Narway Constrction Law

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The International Comparative Legal Guide to:

Construction & Engineering Law 2018
5th Edition
A practical cross-border insight into construction and engineering law
Published by Global Legal Group, with contributions from:
Abuka & Partners, Legal Practitioners Makarim & Taira S.

Advokatfirmaet Thommessen AS Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law
Aleksey Pukha and Partners Matheson
Allen & Gledhill Mattos Filho, Veiga Filho, Marrey Jr e Quiroga
Ashurst Advogados
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The International Comparative Legal Guide to: Construction & Engineering Law 2018
General Chapters:
1 More Thoughts on Contractual Interpretation – Tim Reid, Ashurst 1
2 Saudi PPP: Lessons Learned from the International Market – Richard Dyton & Simon Moore,
Simmons & Simmons LLP 3
3 Interim Methods of Dispute Resolution – David Nitek & Nicholas Downing, Herbert Smith Freehills LLP 7
Contributing Editor
Tim Reid, Ashurst Country Question and Answer Chapters:
Sales Director 4 Australia Clyde & Co: Kon Nakousis & Teodor Lomaca 12
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Sales Support Manager Thiago Moreira & Eduardo Damião Gonçalves 30
Toni Hayward
7 Canada Miller Thomson LLP: William J. Kenny & Leanna Olson 39
Editor
Sam Friend 8 England Ashurst: Tim Reid & Michael J. Smith 48
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Dror Levy
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Group Consulting Editor
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& Alix K. Town 203
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Chapter 1
More Thoughts on
Contractual Interpretation
Ashurst Tim Reid
■ Paragraph 3.2.2.2 of the TRs required that “the design of the

Introduction foundations shall ensure a lifetime of 20 years in every aspect
without planned replacement”.
In previous editions of this guide, we have looked at the Supreme
■ Paragraph 3b.5.1 of the TRs provided that “the design of
Court decisions in the Makdessi [2015] case on penalty clauses the structures … shall ensure a lifetime of 20 years in every
and Wood v Capita [2017] which concerned indemnity provisions. aspect without planned replacement”.
While neither case involved the construction industry, both were
The court had to decide whether clause 8.1, read in conjunction with
relevant because they concerned the interpretation of contract
the TRs, imposed a strict obligation on MTH to achieve a service
clauses. Construction contracts are often complex and unwieldy with
life of 20 years or whether the obligation was simply to design
many constituent parts including technical documentation as well as
the foundations in accordance with J101 on the basis of a 20-year
legal provision. As a result, the risk of inconsistent or contradictory
design life.
drafting can be high. UK construction lawyers were therefore very
interested in the outcome of a recent case, MT Højgaard A/S v
E.ON Climate & Renewables UK Robin Rigg East Limited and The Technology and Construction Court
another [2017] UKSC 59, in which the Supreme Court was asked (First Instance) Decision
to interpret the complex, and potentially conflicting, contractual
arrangements in place for the procurement of the foundations of two Edwards-Stuart J in the Technology and Construction Court held that
adjacent offshore wind farms in the Solway Firth, UK. paragraph 3.2.2.2 of the TRs required MTH to provide foundations
In Højgaard, the foundation structures of the wind farms failed with a service life of 20 years. This was not inconsistent with
shortly after completion of the project and the question before the MTH’s less onerous obligation to comply with J101, but was, in
courts was whether the contractor was liable for this failure. In the fact, in addition to it. As the foundations had failed and therefore
words of the Court of Appeal judge, Jackson LJ, the decision rested did not have a service life of 20 years, MTH were in breach of clause
on “how the court should construe the somewhat diffuse documents 8.1, even though they had complied with J101 and the design was
which constituted, or were incorporated into, the ‘design and build’ not negligent.
contract in this case”.
The Court of Appeal Decision

Background
In the leading judgment, Jackson LJ observed that while there
In 2006, E.ON Climate and Renewables UK Robin Rigg East Ltd had been no negligence or want of professional skill on either
(“E.ON”) engaged MT Højgaard A/S (“MTH”) to design, fabricate side, someone nevertheless had to pick up the bill for repairing
and install the foundations for 60 wind turbine generators for the the defective foundations. The court’s job was to make sense of
Robin Rigg offshore wind farms in the Solway Firth. contractual documents of “multiple authorship, which contain much
The Technical Requirements (“TRs”) which formed part of the loose wording” in order to establish who should bear the costs.
Employer’s Requirements included an obligation on MTH to design Whereas Edwards-Stuart J had approached the construction of the
the foundations in accordance with an international specification contract by strict reference to the documents before him, the Court
(“J101”). Shortly after installation, it was discovered that there was of Appeal took a wider approach encompassing industry background
movement in the ground connections, requiring substantial remedial and commercial considerations. In doing so they rejected Edwards-
works. The defects were caused by an error in J101, unknown at the Stuart J’s interpretation and held that the contract did not include a
time the contract was entered into. warranty for 20 years of service life. Jackson LJ drew a distinction
As well as the obligation to design the foundations in accordance between “design life” and “service life” and concluded that a
with J101, the contract contained a number of other relevant structure with a design life of 20 years will not inevitably function
obligations: for 20 years, even though it probably will. Compliance with
■ Clause 8.1(x) required MTH to complete the works “so that J101, even it were error-free, would not guarantee the foundations
each item of Plant and the Works as a whole shall be free would last for 20 years and the parties would not have instructed
from defective workmanship and materials and fit for its compliance with J101 if their intention was that the contract should
purpose as determined in accordance with the Specification impose a “service life” obligation. Indeed, observed Jackson LJ, if
using Good Industry Practice”. E.ON had intended such a guarantee, MTH would have had to make
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
Ashurst More Thoughts on Contractual Interpretation
allowance for that in its tender and “the need for such allowance 3.2.2.2, he viewed it as being “clear in its terms” and neither
should have been clearly flagged up in the contract documents”. improbable nor unbusinesslike. In responding to MTH’s contention
The Court of Appeal also held that the contract did not contain a that it was significant that the obligation was “tucked away” in the
free-standing warranty as to quality. Although clause 8.1(x) referred TRs rather than spelled out in the contract (a point that attracted
to the works being “fit for purpose”, this was qualified by reference substantial attention from lawyers commenting on the Court of
to the “Specification using Good Industry Practice”, which required Appeal decision), Neuberger stated that he was “unimpressed” as
MTH to exercise a standard of reasonable skill and care only. The it was clear from the terms of the contract that the provisions of the
TRs were intended to be of contractual effect.
relevant extract of paragraph 3.2.2.2 and paragraph 3b.5.1 were,
in the opinion of the court, inconsistent with the other contractual
provisions and “too slender a thread upon which to hang a finding Comment
that MTH gave a warranty of 20 years life for the foundations”.
The Court of Appeal acknowledged that a sufficiently clearly The Supreme Court emphasised that this case was decided by
worded warranty could give rise to a service life obligation, but reference to ordinary principles of contractual interpretation. While
there was no such warranty in clause 8.1. the result may be construed as harsh from MTH’s perspective, the
language the parties used was, in the opinion of the Supreme Court,
clear and had to be given primacy.
The Supreme Court Decision This case is the latest in a string of cases, including Wood v Capita,
in which the Supreme Court has given primacy to the words the
Having first refused E.ON permission to appeal, the Supreme Court parties have used and not to their apparent intentions. While this
then, for what is thought to be the first time in its history, did a is a more straightforward approach, it underlines the importance of
U-turn. It did not comment on the reasons for the change of heart. careful and precise drafting not only in relation to each individual
In giving judgment, Lord Neuberger (with whom the other judges clause, but to the contract as a whole.
unanimously agreed), held that there were only two arguments
open to MTH as to why paragraph 3.2.2.2 should not be given its
natural effect. The first argument was that such an interpretation Tim Reid
would result in an obligation which was inconsistent with MTH’s Ashurst
Broadwalk House
obligation to comply with J101. The second argument was that
5 Appold Street
paragraph 3.2.2.2 was simply “too slender a thread” on which to London EC2A 2HA
hang such an important and potentially onerous obligation. United Kingdom
Setting aside the decision of the Court of Appeal, Lord Neuberger Tel: +44 207 859 1548
held in relation to the first argument that rather than concluding that Fax: +44 208 638 1112
the two provisions were inconsistent, the correct analysis (by virtue Email: tim.reid@ashurst.com
URL: www.ashurst.com
of the opening part of section 3 of the TRs which provided that the
requirements in section 3 were a minimum) was that “the more Tim Reid is a partner in London and specialises in the resolution of
rigorous or demanding of the two standards or requirements must disputes in the energy and construction and civil engineering sectors
both in the UK and internationally. His current and recent cases cover
prevail, as the less rigorous can properly be treated as a minimum a broad spectrum and include disputes arising from multi-million
requirement”. The opening part of section 3 also required MTH pound PFI projects in the UK and exploration for oil and gas reserves
to “identify any areas where the works need to be designed to any off the coast of Africa.
additional or more rigorous requirements or parameters”. Therefore, Tim has experience of all forms of dispute resolution. In addition
in Lord Neuberger’s opinion, even if there was an inconsistency, to the successful conduct of High Court proceedings, Tim also has
MTH would still be liable for failing to comply with the required considerable experience of the successful conduct of adjudications,
criteria, as it had a duty to identify the need to improve on the design. arbitrations (national and international) and a large number of
mediations. As well as being a solicitor in England and Wales, Tim is
In relation to the second argument, that paragraph 3.2.2.2 was too admitted as a solicitor in Hong Kong.
weak a basis on which to rest such an important obligation, MTH Tim is recommended as a Leading Individual in The Legal 500 and
made a number of contentions to which Lord Neuberger responded ranked in the Chambers UK Guide for Construction.
in the judgment. In relation to the particular wording of paragraph
Ashurst is a leading international law firm advising corporates, financial institutions and governments. With 25 offices in 15 countries, Ashurst offers
a worldwide reach and the international insight of a global network, combined with local market knowledge. Our non-contentious construction group
advises all parties involved in UK and international real estate transactions and clients, project sponsors and lenders involved in UK and international
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Chapter 2
Saudi PPP: Lessons

Learned from the Richard Dyton
International Market
Simmons & Simmons LLP Simon Moore
PPPs form a vital part of Saudi Arabia’s “2030 Vision”, a plan for to consider the lifecycle costs and the long-term performance of the
the Kingdom, released in 2016 by Crown Prince Mohammad bin project than a number of parties would, each with an interest in only
Salman, which aims to increase the role of the private sector in the a part of the project.
economy and lessen the country’s future dependence on oil. The PPPs have of course been criticised for concealing public borrowing
goal is to increase the percentage of private sector investment in and providing long-term guaranteed profits to companies in the
national GDP from 40% in 2016 to 65% in 2030. The National private sector. Other more specific concerns include that the
Center for Privatisation & PPP or “NCP”, which was instituted initial costs of analysing the suitability of a project for a PPP and
by a Council of Ministers Decision in 2017, is the investment arm negotiating the documents will be high. Private sector funding costs
of the Saudi government and responsible for activating initiatives may well be higher, as government borrowing is perceived to be less
between the public and private sectors. The opportunities for long- of a risk so lower interest rates will apply. Although the government
term foreign investment in the Kingdom are many, with an extensive retains monitoring rights over the project in the long term, there
schools PPP programme (covering 4,000 school PPPs) already is inevitably a loss of government control in the management and
announced. operation of the project.
Although Saudi Arabia has seen limited full PPP contracts
completed so far, such as the Madinah Airport PPP, a 25-year
concession which achieved financial close in 2012, there have been Suitability of PPPs
projects with virtually all the same characteristics, including the
MASIC project, which involves the Development & Construction The suitability of the PPP model for a particular infrastructure
of Residential Buildings and Support Facilities. The project covers project will be influenced by political interest in delivering the
an area of approximately 700,000 square metres, accommodating relevant infrastructure quickly and the availability of private sector
2,500 employees working in the Fadhili Gas Plant in the Eastern capital (both debt and equity), both of which seem prevalent in Saudi
Province, Saudi Arabia. Additionally, the East-West Pipeline Arabia. In addition, a value-for-money analysis which compares the
compounds project has again been procured by Saudi ARAMCO. costs of traditional government contracting against the costs of using
a PPP over the full term of the project should be conducted, and in
This article considers some of the key issues relating to PPPs from
some jurisdictions, PPP legislation requires this financial analysis.
a construction and engineering perspective, but also places these
issues in a broader context of factors to take into account when
undertaking PPPs in Saudi Arabia. For the purposes of this article, Typical Contracting Structure
we define PPP as a contractual arrangement, usually of a long-term
nature, between a government entity and a private sector consortium
for the funding, building and operation of public assets or services
such as schools, hospitals, roads or prisons.
Background
It is worth first recapping some of the recognised pros and cons

of PPPs in general. PPPs have many advantages, including risk
transfer away from the public body and the enabling of a project that
might otherwise not be possible with public funds. The expertise
of the private sector is utilised where it may not be available within
the government. There are likely to be cost savings as one entity is
responsible for the project, so the costs involved if the government
were to contract with a number of different parties are reduced.
The private sector entity has an incentive to see that the project is PPPs can constitute a variety of different structures and partnership
built and that performance levels are sufficient to ensure payment arrangements, but the typical contracting structure of a PPP project
of the unitary charge by the government under the relevant Project starts with a Project Agreement between the government entity,
Agreement. Being responsible for the project from design, through or the Authority as they are often referred to in the contractual
construction and operation, the private sector entity is more likely documents, and a special purpose vehicle, or “SPV”, made up of

Simmons & Simmons LLP Saudi PPP
private sector companies, for the construction and/or refurbishment,

Conflicts of Interest
operation and maintenance of the project asset/facility. The SPV,
referred to as the Project Company in the documents, will then enter
A Project Sponsor or its affiliated company often takes on a role at
into contracts with an Engineering, Procurement and Construction
contractor level; for example, where the EPC Contractor is also part
Contractor, or “EPC Contractor” and an Operation and Maintenance
of the SPV. Generally this can work to the benefit of the project as
Contractor or Facilities Management Contractor. These contractors
the contractor is incentivised to perform, but conflicts of interest
may enter into an interface agreement to govern their liabilities
may emerge.
to each other. The EPC Contractor will enter into a series of sub-
contracts for the different elements of the design and construction As discussed above, the Sponsors should wish to see the majority of
of the facility. The Project Company borrows most of the funds risks passed down the chain, but where a Sponsor is also a contractor,
required for the development and the Project Sponsors provide the it is important to guard against terms that are too favourable to the
equity investment for the project and form the SPV to carry out the contractor. The EPC Contract and other sub-contracts will need to
project. be negotiated on an arm’s-length basis with separate legal teams
representing the different parties. The contract terms need to be on
this basis as Sponsors may transfer their investment in the Project
Contractor Covenant Strength Company or the Project Company may want to change to a different
contractor. The Sponsors also need to prove to the Authority and the
The most current concern for PPP projects in Saudi Arabia perhaps Lenders that the contracts represent value for money.
centres on the covenant strength of EPC Contractors, with a number Another conflict of interest can arise in a dispute scenario, where
of significant contractor collapses occurring already, such as the perhaps construction costs have run over and there is a need for a call
Saudi Binladin Group. The lessons learned from the collapse of on a guarantee provided by a Project Sponsor who is affiliated to the
Carillion in the UK should be applied to PPP projects in Saudi. One EPC Contractor. The Lenders will usually require an independent
of the reasons that Carillion, the second largest contractor in the Technical Advisor, separate from the Project Company and its
UK, went into insolvency was because it invested heavily on high- affiliates, to be responsible for running the project and to assist
volume, low-margin public sector contracts containing extremely in managing any conflicts such as these. The Technical Advisor
onerous risk transfer provisions and prices which could be uplifted will act for the Lenders but its authority will be accepted by the
only with material change (which then did not happen). The Sponsors for any testing or verification purposes for the handover
government should be aware that a “cheapest wins” procurement and operation of the facility.
strategy will never deliver best value to either the government or
the private sector.
Limitations on Liability and Liquidated
Damages
Back-to-Back Liabilities
Within the EPC Contract, certain liabilities are likely to be capped
EPC and O&M (Operation and Maintenance) Contracts are
in line with market practice. This can vary significantly between
traditionally drafted, to the greatest extent possible, so that the
jurisdictions and sectors. There is usually a sub-cap for delay
obligations and liabilities from the Project Agreement that are
liquidated damages. Liquidated damages are not usually imposed
relevant to the construction and O&M phases will be placed within
on the Project Company because the Project Company will need to
the EPC and O&M Contracts. This drafting on a “back-to-back”
meet debt repayments to Lenders. The level of liquidated damages
basis will be sought by the Lenders to the project, and EPC and
at the EPC level should reflect these debt repayments on the part
O&M Contractors will then want to flow down these obligations
of the Project Company as if the construction completion date is
to their own sub-contractors. Lenders will prefer to see sub-
not met, the regular payments due to the Project Company from the
contracts undertaken by as few companies as possible to avoid any
Authority will be postponed.
gaps in responsibility for aspects of the project. In practice, it can
be difficult to achieve a full back-to-back position as contractors
and sub-contractors seek caps on their liabilities. Where EPC Performance Bonds and Guarantees
Contractors are not familiar with PPP models in early stage PPP
markets, they may be reluctant to assume a full pass-through of the If there is potential exposure due to limitations on liability or
construction risks in the Project Agreement, particularly in relation the covenant strength or security package on offer from the
to liquidated damages for construction delay. EPC Contractor is a concern, the Sponsors and/or Lenders may
The EPC Contract is often drafted as a bespoke “pass-through” of require additional security, such as performance bonds or parent
the construction-related obligations in the Project Agreement. This company guarantees. Performance bonds can be “on demand” or
is the most effective way of ensuring that all relevant (construction) “conditional”. On demand bonds are still requested, where the
risks in the Project Agreement have been passed down to the EPC bondsman pays an amount of money set out in the bond immediately
Contractor, a key issue for Lenders who want to ensure that the SPV on demand without needing to satisfy any preconditions including
retains as little risk as possible. A less common approach would be establishing the contractor‘s liability. Often these are not acceptable
to use an international standard form of contract such as a FIDIC or in the market and conditional bonds will be more appropriate for
NEC form. This may suit the EPC Contractor if it is familiar with contractors and sub-contractors. Conditional bonds require that the
a standard set of terms and conditions, but it is more challenging to recipient provides evidence that the contractor has not performed
ensure a full and transparent pass-through of all relevant risks in the their obligations under the contract and that they have suffered a
Project Agreement down to the EPC Contractor, and will be of more loss as a consequence.
concern to Lenders.

calculated as the sum due to the EPC Contractor for the works,
Direct Agreements and Collateral
less the Project Company’s losses resulting from the termination
Warranties including the finance costs. Provisions are usually included that
entitle the EPC Contractor to a period in which it may attempt to
The EPC Contractor will engage design consultants such as an rectify a default following service of a termination notice by the
architect and structural engineer and specialist sub-contractors; for Project Company, although default events may be specified which
telecoms, for example. Each of the key consultants and specialist have been agreed to be not capable of rectification.
sub-contractors will be required to provide collateral warranties
in favour of the Project Company. These provide a direct right of
access to the supply chain if the EPC Contractor falls into financial Compensation Payments
difficulty, and Lenders will not provide funding for a project without
them. Interim payments are usually made under the EPC Contract in
The EPC Contractor itself will enter into a direct agreement with the scheduled instalments on a guaranteed maximum price or fixed price
Project Company and the Lenders. Direct agreements in favour of basis. Payments for the works will come from the equity and debt
the Lenders give the Lenders a right to “step in” to the key Project funding in the Project Company and the Project Company will be at
Agreements (such as the EPC Contract) in the place of the Project risk where the EPC Contractor becomes entitled to additional sums
Company, if the Project Company has defaulted in some way. under the EPC Contract which the Project Company is not entitled
The Lenders will arrange for a new entity to take the place of the to under the Project Agreement (e.g. an EPC Contract variation
Project Company in order to avoid termination of the project, and to which is not agreed and implemented under the Project Agreement).
preserve the revenue stream under the relevant Project Agreement. Although the parties will seek to ensure that the EPC Contractor’s
entitlements to additional time or payments are back-to-back with
the Project Company’s entitlements under the Project Agreement,
Fitness for Purpose disputes will often occur in relation to entitlement and amounts
which can result in delayed payments under the Project Agreement,
Fitness for purpose warranties are often expected of the Project creating a funding gap. The Project Company will seek to ensure
Company, who will then wish to pass them down the supply chain. that “equivalent project relief” provisions are (directly or indirectly)
A design “fitness for purpose” obligation, with its imposition of a included in the EPC Contract (i.e. the EPC Contractor will only be
higher duty than reasonable skill and care and its likelihood to be entitled to payment when the Project Company receives payment
uninsurable, will want to be avoided by the EPC Contractor and under the Project Agreement).
its sub-contractors. A recent case in English law, which may be
In the UK, the Housing Grants, Construction and Regeneration
relevant down the supply chain, illustrates the issues arising with
Act 1996 disallows this type of provision, although “pay-when-
fitness for purpose generally. In MT Højgaard A/S v E.On Climate
certified” clauses are permitted in this type of design and build
and Renewables UK Robin Rigg East Ltd and another [2017] UKSC
contract (but not in the sub-contracts entered into by the contractor).
59, the court enforced a fitness for purpose obligation even though
These restrictions have led to parallel loan agreements, where the
it was only set out in the technical specification. The contractor had
EPC Contractor loans the amount to the Project Company that is due
designed and built the foundations in accordance with international
to the EPC Contractor and then is repaid the amount when received
standards and without negligence, but an error in the international
by the Project Company from the Authority.
standard meant that defects emerged. As a result, the contractor was
found to be liable for defects in wind farm turbine foundations, with An alternative is a claw-back arrangement where the Project
remedial works costing EUR 26.25 million. Company will make a payment to the EPC Contractor but can claw
back any part of the sum that it does not subsequently receive from
EPC Contractors and their sub-contractors should carefully consider
the Authority. If a greater amount is received from the Authority than
wording of this nature in their contracts, even if it is in the technical
was received by the EPC Contractor, then any additional amount
requirements. Typically, professional indemnity insurance policies
can also be paid to the EPC Contractor by the Project Company
exclude cover for strict liability, such as a guarantee of fitness for
under this arrangement. This set-up can operate down the chain so
purpose, so it could leave the contractor exposed to an uninsured
the EPC Contractor will operate the claw-back mechanism with its
liability for a significant sum.
sub-contractors to lessen the risks of a funding gap at that level too.
Termination Payments
Bankability
The payments due to the EPC Contractor following termination will
PPP programmes in new markets will generally only generate
vary depending on the reason for termination. Where termination
traction if the risk profile of these projects is bankable, i.e. the risk
occurs without contractor default; for example, a voluntary
profile is acceptable to senior funders. Some examples of these
termination by the Authority under the Project Agreement, the
issues are: (i) covenant strength of the government counterparty
compensation will usually be direct losses, costs, expenses,
(does the government counterparty who signs the Project Agreement
damages and liabilities reasonably incurred and notified to the
have the financial resources to meet the monthly availability
Project Company by the EPC Contractor within a specified period.
payments and the compensation on termination payments (should
The EPC Contractor will seek to ensure that their losses of profits,
they arise)); (ii) payment of lender liabilities on early termination
as well as the costs of breaking the contract, are included. This
(whether all outstanding amounts are payable under the funding
issue should be commercially agreed between the EPC Contractor
documents, including swap breakage costs, payable in defined early
and the contractor at an early stage of the relevant project, given its
termination scenarios under the Project Agreement – and where they
commercial significance. For contractor default-based termination,
are not, what financial exposure is acceptable to senior funders);
such as a material breach of its obligations or failure to complete
(iii) events outside private sector control (to what extent are senior
the works by a longstop date, the sum payable will generally be

funders protected where events occur which are outside of SPV or

Conclusion
senior funder control e.g. change in law); and (iv) to what extent
has the SPV retained the risks in the Project Agreement (rather than
In Saudi Arabia, the National Center for Privatisation & PPP or
passing down these risks to the EPC or O&M Contractor).
“NCP” is tasked to enable privatisation by formulating regulations,
creating privatisation frameworks and preparing robust processes
Dealflow and PPP Legislation that will serve as a blueprint for agencies and entities to follow,
that will drive forward the privatisation and PPP process. There is
This is essential to generate sustained private sector interest. If a clearly political support for PPP in Saudi Arabia. Developers and
bidder takes the view it will win e.g. one in three bids, then sustained funders will, as always, wait to see if this manifests itself in PPP
dealflow (i.e. a steady flow of projects issued by government) is dealflow and PPP projects that reach financial close.
essential to make the economics of PPP work for the private sector. The plans in the Kingdom continue to develop as April 2018 saw the
Submitting a bid can be expensive, and unless bidders can recover official launch of the nation’s Privatisation Program, led by the NCP.
sunk bid costs through winning projects, economically this becomes The Program includes drafting a public-private partnership law that
unsustainable for the private sector. PPP legislation it not in itself an will protect the rights of both users and investors.
issue, but enabling PPP legislation without dealflow will not in itself
generate a healthy and sustainable PPP market. Sector-specific Acknowledgment
standard form PPP contracts can also be helpful in sustaining a PPP
market, giving all parties concerned certainty around the risk profile The co-authors would like to thank Fleur Laventure and Joe Snape
of the relevant PPP sub-sector and its bankability. for their significant and valuable assistance in the preparation of this
chapter.
Richard Dyton Simon Moore

Simmons & Simmons LLP Simmons & Simmons LLP
City Point, One Ropemaker Street City Point, One Ropemaker Street
London, EC2Y 9SS London, EC2Y 9SS
United Kingdom United Kingdom
Tel: +44 20 7825 4203 Tel: +44 20 7825 3188

Email: richard.dyton@simmons-simmons.com Email: simon.moore@simmons-simmons.com
URL: www.simmons-simmons.com URL: www.simmons-simmons.com
Richard is Head of the International Projects Group and specialises in Simon is a Partner in the Energy, Natural Resources and Infrastructure
non-contentious construction law in the UK and internationally. Group, and specialises in PPP projects in Europe and the Middle East.
In addition to being a member of the Society of Construction Law, Simon advises on complex concessions, EPC, O&M, outsourcing and
Richard is also an accredited adjudicator at the Institution of Civil joint venture agreements.
Engineers. He holds an MSc in construction law and arbitration
from King’s College, London. He is also one of the authors of the
“Architect’s Legal Handbook”.
Richard acts on all stages throughout the construction process from
the provision of building contracts, performance bonds and guarantees
to insurance arrangements. He has experience in advising clients in a
range of construction matters, including:
■■ advising a Sponsor on EPC issues in a PPP project in KSA; and
■■ advising Saudi investors on a major new build development.
We are a leading international law firm with fully integrated teams working across 22 offices in Europe, the Middle East and Asia. Our focus on
a small number of sectors means we are able to understand and respond to our clients’ needs. Our industry sectors are: Asset Management &
Investment Funds; Financial Institutions; Life Sciences; and Telecoms, Media & Technology (TMT). We also focus on the Energy & Infrastructure
market, in particular through our international projects and construction teams. We have a track record for innovation and delivering value to clients
through new ways of working.

Chapter 3
Interim Methods of
Dispute Resolution David Nitek
Herbert Smith Freehills LLP Nicholas Downing
construction projects, particularly where the project involves parties

Introduction
from different jurisdictions. In comparison to NEC, FIDIC has,
historically, been a more “adversarial” form of contract.
It is inevitable that construction projects will give rise to claims.
“No battle plan survives first contact with the enemy”, to paraphrase NEC4 retains the emphasis on proactive management – indeed,
nineteenth century Prussian military commander Helmuth von NEC’s stated aim was that the changes in NEC4 would be “evolution
Moltke, is a phrase that is apt in a construction context. Contractors not revolution” – but there is now a greater emphasis on dispute
will, in the course of performing the works, encounter events that avoidance and provisions that are designed to make the contract
affect progress or cost, and no complex construction project was more international in nature. The aim, it would appear, is to sell
ever delivered exactly as planned in the baseline programme. For the NEC model, so widely adopted in the UK, to the world. As
this reason, construction contracts contain detailed provisions explained further below, NEC is therefore stepping closer to some
setting out whether those events carry an entitlement to an extension of the more international elements of FIDIC.
of time and additional cost, and, if so, how the claim is to be made FIDIC 2017, on the other hand, places a greater emphasis than
and then assessed. Those provisions are perhaps the most important, before on proactive project management and early resolution of
and frequently disputed, in any construction contract. risk. It frequently bolsters those project management provisions
At the same time, it is increasingly recognised that construction with time bars that give them real teeth. FIDIC is therefore stepping
contracts have a role to play beyond simply apportioning risks closer to the NEC approach of proactive project management from
between the parties once a risk event has been encountered. commencement to completion. However, the new FIDIC forms do
Construction contracts can become a management tool which not contain a fundamental reassessment of risk allocation in its suite
encourages the parties to avoid claims in the first place and, if claims of contracts, and so, in that sense, it is not regarded as a collaborative
cannot be avoided, to resolve them without recourse to formal contract in the same way as NEC.
dispute resolution processes. In emerging markets, where the focus is on risk transfer to the supply
These trends are reflected in the 2017 amendments to the NEC chain, there are significant headwinds against this more progressive
and FIDIC forms of contract. In June 2017, NEC updated its suite approach. FIDIC is considering whether it can overcome these
of contracts, from NEC3 to NEC4. In December 2017, FIDIC issues through the use of its Golden Principles, a possible new
published updates to its Red (Construction), Yellow (Plant and approach to signify that a contract designed for a particular project
Design-Build) and Silver (EPC/Turnkey Projects) books. has FIDIC’s seal of approval.
Fundamentally, the philosophy of the new FIDIC and NEC standard We set out below some of the key changes in NEC4 and FIDIC
forms remains the same as their predecessors: FIDIC seeks to 2017; how construction contracts can provide a valuable framework
allocate risks to the party in the best position to bear and manage for managing claims and avoiding disputes; and whether these
such risk; whereas NEC only allocates risks to the Contractor where forms of contract are the future of contracting.
the risk can genuinely be controlled by the Contractor, with all other
risks remaining with the Employer. The NEC approach means that, Proactive Project Management
by comparison to FIDIC, more cost and programme contingency
should sit with the Employer, but ensures that unnecessary risk
Proactive project management has, of course, many facets, but
premiums are not paid to the Contractor. Further, and while NEC
there are two particular features in NEC4 and FIDIC 2017 that are
has been at the forefront of promoting a more proactive approach to
addressed below: the early identification of risk; and the importance
project management and the identification and management of risk,
of the programme to the proper administration of the contract.
it is now clear that FIDIC is moving in this direction as well.
The NEC contract is widely used in the UK, and is the preferred
Early warning
contract for many publicly procured works. For example, it was
used for the London 2012 Olympics and Crossrail, and is being
used for HS2, the new high-speed rail line connecting London NEC has always placed great emphasis on the early identification
and Birmingham. It is also increasingly used internationally; for by both parties of risks. At the outset of a project, NEC4 (Clause
example, in Australia, Hong Kong and South Africa. 15.2) requires the Project Manager to prepare a first early warning
register (formerly risk register) within one week of the start of the
The FIDIC forms of contract are perhaps the most widely used
contract. The early warning register should identify any matters
of all standard form construction contracts in international

Herbert Smith Freehills LLP Interim Methods of Dispute Resolution
which could delay completion of the works or a key date, or which all relevant circumstances”, and the absence of an advance warning
could increase cost. The Project Manager is also required to instruct advice would, presumably, be one such circumstance. Further, and
the Contractor to attend a first early warning meeting to discuss the on an English law analysis, if certain costs could have been avoided
matters identified in the early warning register within two weeks of if the Contractor had met its obligation to issue an advance warning,
the start of the contract. then a tribunal is likely to be slow to conclude that those costs are
Then, throughout the project, as soon as the Contractor or Project recoverable, since they will, arguably, represent a failure to mitigate.
Manager identifies any other matter which could delay completion It is also worth noting that the requirement to provide advance
or increase cost, a notice is given to the other party (Clause 15.1). warning is a mutual obligation. Therefore, if the Employer or the
Both the Contractor and Project Manager can then instruct the other Engineer does not give advance warning advice where it would
to attend an early warning meeting at which the parties discuss how have been possible to do so, this could be construed as an act of
to avoid or reduce the effects of the risk event and agree actions. prevention or impediment by the Employer, entitling the Contractor
The early warning register should be updated throughout the project to additional time and cost. This could impact on the allocation
to reflect risks encountered and the steps agreed at the early warning of risk under the contract (particularly where the event in question
meeting. relates to an issue that is within the Contractor’s control), and might,
The parties are therefore encouraged to approach risk in a proactive in some instances, result in risk transferring back to the Employer.
way. They do not wait until a risk materialises before they discuss
how to respond to it, since by that point it may be too late to The programme
respond effectively. Rather, risks are to be identified at the earliest
opportunity, where possible before they have arisen, since they will The programme has long been at the centre of NEC. The Contractor
be easier to manage if the parties are forewarned and have prepared is required to submit a programme to the Project Manager for
a plan of how to respond. acceptance on a periodic basis (at intervals specified by the parties;
In NEC, the early warning mechanism in Clause 15 is more than just often 28 days), and all extensions of time are assessed against the
fine words. If the Project Manager decides that the Contractor could latest accepted programme. In that way, extensions of time are
have given an early warning notice but did not, the Contractor’s grounded in the current reality of the project and can be assessed
entitlements are assessed on the basis that a notice had been given. quickly, without the need to create a baseline against which to
Therefore, if the Employer or Project Manager could have mitigated impact particular delay events.
the time or cost consequences of an event had they known about it The payment provisions incentivise the Contractor to prepare a
earlier, the Contractor’s entitlement to relief will reduce accordingly. compliant baseline programme and identify it in the contract: by
In this way, the regime has real teeth. clause 50.5, if there is no baseline programme identified in the
In the 2017 forms, FIDIC has, for the first time, introduced a similar contract, one quarter of the amounts due to the Contractor are
system. Sub-Clause 8.4 sets out an “Advance Warning” regime retained until such time as the Contractor submits a programme
which obliges both parties to advise the other of “any known or showing the information required by the contract. It is also in the
probable future events or circumstances which may . . . increase the Contractor’s interests to keep its programme in an acceptable form
Contractor Price and/or delay execution of the Works or a Section”. throughout the performance of the contract: if there is no accepted
The Engineer can then ask the Contractor to submit a proposal to programme, extensions of time are based on the Project Manager’s
“avoid or minimise the effects of such event(s) or circumstance(s)”. own assessment of the amount of work remaining.
Further, there are new provisions on “management meetings” For its part, the Project Manager is incentivised properly to review
(Sub-Clause 3.8), which can be called either by the Engineer or the accepted programme since, if the Project Manager fails to
the Contractor’s Representative with the wide-ranging brief of notify acceptance or non-acceptance within a prescribed period,
discussing “arrangements for future work and/or other matters in the programme is deemed to be accepted, and will then form the
connection with the execution of the Works”. basis against which any entitlements for compensation events are
As with NEC, the emphasis is on avoiding or minimising the assessed.
effect of future events or circumstances – both parties are therefore FIDIC 2017 has not gone so far as to require submission of a
encouraged to approach the identification and management of risk revised programme within fixed intervals, instead maintaining the
in a proactive and collaborative way. formulation from the 1999 forms that the programme is resubmitted
However, unlike early warning meetings in NEC4, the management when it “ceases to reflect actual progress or is otherwise inconsistent
meetings in FIDIC 2017 are not expressly linked to the advanced with the Contractor’s obligations”. This is, perhaps, unfortunate,
warning process, albeit there is clearly a correlation. Indeed, the since the FIDIC formulation is so wide that strict compliance would
effective use of management meetings requires the parties to adopt be a challenge – programmes may cease to reflect actual progress
a voluntary code of practice as there is no express duty on the on a daily basis and, arguably, a defined period for resubmission
parties to co-operate in such meetings in order to manage risks and would promote more certainty and instil more discipline. (Although
their consequences. Further, unlike NEC4 where an early warning the Engineer can notify the Contractor that the programme is out
register is maintained, there is no standing agenda for management of date, and the Contractor is then required to issue a revised
meetings in FIDIC 2017, and there is no express obligation on the programme within 14 days (Clause 8.3).)
parties to implement any decisions taken at a management meeting. However, FIDIC 2017 contains enhanced programme requirements:
Further, unlike in NEC, FIDIC 2017 provides no express sanction there is an obligation to provide the programme in electronic format;
for failing to give an advance warning. On its face, this might be there is a fuller and more prescriptive list of what should be included,
said to remove any real incentive to comply. However, the failure to including that all activities are “logically linked and showing the
advise through the advance warning process in circumstances where earliest and latest start and finish dates for each activity, the float
it would have been possible to do so, is, it is suggested, a matter (if any), and the critical path(s)”; and the supporting report that
that the Engineer or a tribunal is entitled to take into account when is to accompany each programme is more detailed, including the
deciding on a claim. In particular, Sub-Clause 3.7.2 provides that, identification of significant changes to the previous programme
in making a determination, the Engineer shall take “due regard of and the Contractor’s proposals to overcome the effects of any

delays. However, we anticipate that Contractors may be reluctant to between them “in an endeavour to reach agreement” on any claim.
declare their float for fear that the Employer may try to squeeze the In essence, the Engineer has 42 days to facilitate an agreement
programme during pre-contractual negotiations. between the parties, failing which the Engineer then makes a
The refreshed emphasis in FIDIC 2017 appears to be on the use determination.
of the programme as a project management tool, like NEC. It is Of course, this could impose quite a burden on the Engineer – the
difficult to identify whether a risk event may cause delay unless Engineer is asked to act as quasi-mediator for up to 42 days, and then,
there is a robust programme with a clear critical path to completion. if his efforts are unsuccessful, make a formal determination. This
The express requirement to submit an electronic programme is could prove very time consuming, particularly if there are multiple
also welcome, as it allows the Engineer properly to interrogate the claims in parallel. It could also be questioned how willing parties
programmes submitted for acceptance, and provides the opportunity will be to explore commercial compromises in front of the person
for an Employer to form its own view on the potential impact of a who will then be asked to determine the dispute if no compromise
risk event. is reached. Nevertheless, the principle that the parties should be
Moreover, the Engineer now has an express duty to review the encouraged to settle before making claims is to be welcomed.
programme and identify any non-compliance with the contract terms Second, FIDIC 2017 provides for dispute boards (now known as
and any more detailed programming provisions in the Employer’s Dispute Avoidance/Adjudication Boards, or DAABs) to play a more
Requirements. This reflects the significance to the project of having preventative role in dispute avoidance.
a robust, tested and compliant programme, not least because it FIDIC has long advocated dispute boards as a means of resolving
allows risk events and extensions of time to be properly assessed. disputes in a setting that is quick and (relative to arbitration or
It is also in both parties’ interests to ensure that the programme is litigation) informal. Indeed, dispute boards are increasingly seen on
robust and up to date as it is a key piece of information that can large international construction projects, and in large part this is the
be used for evidential purposes in relation to any future dispute or result of FIDIC championing their use.
disagreement.
In FIDIC 2017, the dispute board provisions have a greater emphasis
on dispute avoidance. In particular, the remit of the DAAB now
Time Bar includes the provision to the parties of “informal assistance” with a
view to resolving issues before they escalate into a formal dispute. In
In many cases, NEC4 and FIDIC 2017 incentivise compliance with essence, the process is that the parties can jointly request assistance
the various project management procedures by the use of time bar or an informal discussion on an issue that may have arisen, and the
provisions. DAAB can then offer views either at a meeting attended by both
parties or on a site visit (Sub-Clause 21.3). The parties are not
NEC has long required strict adherence with time limits, both by the
bound to act upon any advice given by the DAAB, and that advice
Contractor and by the Project Manager. If there is a compensation
will not bind the hands of the DAAB in any future reference, but it
event that entitles the Contractor to additional time and/or money,
may be sufficient to unlock an impasse at an early stage, and before
the Contractor must in some cases give notice within eight weeks of
the parties’ positions have become entrenched.
becoming aware that the event has happened. Otherwise, the right
to make a claim is lost. Similarly, the Project Manager is deemed FIDIC 2017 goes further, and provides that the DAAB can take the
to have accepted the Contractor’s quotation for additional time and initiative and invite the parties to request assistance with a particular
cost if it does not make its own assessment within the time required. matter. Allied to this, the Red, Yellow and Silver books all now
provide for standing DAABs appointed throughout the life of the
FIDIC 2017 makes similar use of time bar provisions. For example,
project. This is a change from the 1999 suite, where the Silver and
if the Engineer does not respond to a programme submission or to
Yellow books provided for an ad hoc dispute board appointed only
a design within 21 days, there is a deemed notice of no-objection.
if a dispute arose. The requirement for standing boards is a key
Similarly, if the parties do not notify claims within 28 days of the
part of the dispute avoidance ethos – plainly, a dispute board cannot
date on which they became aware, or should have become aware,
perform a preventative function if it is only appointed once a dispute
of them, the right to claim is lost. This latter time bar is, though, a
has crystallised.
“soft” time bar, since the failure to notify on time can be disregarded
where late notice is justified in the circumstances. Further, if the NEC4 has taken a step in the same direction. In previous editions
Engineer considers that a claim has been submitted out of time, it of the NEC suite of contracts, there was provision for adjudication,
has 14 days to give notice of the same, otherwise the claim notice a quick (28- to 42-day) method for resolving disputes on an interim
is deemed valid. In this respect, therefore, FIDIC 2017 is less basis. Adjudication is compulsory in the UK and certain other
strict from a procedural perspective than FIDIC 1999, where the jurisdictions and, as adjudication performs (at least in part) the same
requirement to notify within 28 days was absolute. function as a dispute board, the contracts contained no provision
for the type of dispute board seen in the FIDIC forms. That has
In general, however, the direction is the same – towards more
changed in NEC4.
rigorous contract management, with sanctions for missing deadlines
that incentivise the parties to comply. NEC4 now contains a third dispute resolution option: in NEC3,
there was an option that applies if the work is being undertaken in
the UK and is subject to compulsory statutory adjudication (under
Dispute Avoidance which both parties have the right to refer disputes to adjudication at
any time, with either arbitration or litigation as the ultimate forum
Allied to more proactive project management is an increased of dispute resolution); and an option that applies if the works are
emphasis on dispute avoidance in both NEC4 and FIDIC 2017. not subject to compulsory statutory adjudication (under which
The emphasis on dispute avoidance is manifest in FIDIC 2017 in there is a tiered dispute resolution process, starting with the dispute
two principal ways. being referred to senior executives, then to adjudication and then
to arbitration or litigation). NEC4 now provides, as a third option,
First, Sub-Clause 3.7.1 provides that the Engineer shall consult with
a dispute avoidance board, which looks very similar to FIDIC’s
both parties (either jointly or separately) and encourage discussion
DAAB in a number of respects: it is a standing board of between one

and three members; it visits site at intervals specified in the contract; Of course, no form of contract is a panacea. Disputes may still
and its aim is to “[assist] the Parties in resolving disputes before arise no matter how robust the project management and dispute
they become disputes”. Unlike a DAAB, the dispute avoidance avoidance processes. However, if properly administered, the scope
board only has the power to make recommendations, which are for disputes should reduce.
not expressed to be binding, but the parties must nevertheless go The key question is how widely the NEC4 and FIDIC 2017 type
through the dispute avoidance board before they can refer a dispute of approach will be used in practice. There are, here, a number of
to the ultimate tribunal, be it courts or arbitration. considerations.
In stepping towards the FIDIC approach, NEC4 is perhaps looking First, both parties must be prepared and able to administer the
to an international market more familiar with dispute boards than contracts in accordance with their terms. Both NEC4 and FIDIC
with adjudication in line with the UK model; and, more generally, 2017 place a significant administrative burden on the parties. If
at jurisdictions that do not provide for compulsory statutory either party cannot cope with that burden, it could very quickly find
adjudication. In both cases, the trend is an encouraging one: while itself on the wrong side of time bar provisions and, potentially, lose
not all disputes can be resolved informally, there is real value in rights. Further, there is clearly scope for procedural disputes to
identifying and gripping them early and having a mechanism that arise, particularly under FIDIC 2017. That problem arises to a lesser
facilitates input from an independent third party who can provide an extent in more traditional, adversarial forms of contract, which
objective view quickly and without the need for formal proceedings. typically have less extensive procedural requirements and make less
Of course, contracting parties can always look at alternative ways use of time bar provisions. Both NEC4 and FIDIC 2017 need to be
of resolving disputes without the contract giving them choices, but rigorously implemented.
NEC4 and FIDIC 2017 provide an express option and incentivise This may be a particular challenge in markets where process-
compliance – in the case of NEC4, the parties must use the dispute intensive and collaborative contracts are not the norm, and
avoidance board before resorting to formal proceedings, while in particularly in emerging markets where clients are not interested in
the case of FIDIC, the Engineer has a positive obligation to look adopting a more collaborative form of contract. NEC contracts have
for ways of agreeing claims. Moreover, contracting parties may been widely used in the UK (most notably on public projects) since
be reluctant to propose alternative methods of resolving disputes they were commended in the 1994 Latham Report. It is now well
because they are concerned that to do so would appear weak. By understood by the industry, and those who use it buy into what it
making the alternatives contractual, NEC4 and FIDIC 2017 avoid is trying to achieve. But that understanding takes time to develop.
that impression. Second, there will also be a cost associated with an increased
administrative burden, and parties may need to be persuaded that
this cost is worthwhile. Demonstrating value for money is not
The Nature of Construction Contracts and necessarily straightforward – if a dispute is resolved at an early
Challenges stage, you will never know the cost and effort involved in fighting it.
Over time, however, employers and contractors can compare how
We have given above just a few examples of how NEC4 and FIDIC different forms of contract have worked on different projects, and so
2017 are moving towards proactive project management and the can start to develop a view of what works.
avoidance of disputes. What these examples illustrate is a change Finally, there will be particular sectors in which FIDIC and NEC4
in the nature of construction contracts. No longer do they simply may find it harder to gain traction. In the oil and gas sector, for
allocate risk and identify the forum for resolving any disputes example, neither form is, in the authors’ experience, used particularly
that may arise. Rather, they actively encourage the parties to widely, since oil companies often use their own bespoke forms of
administer the contract in a way that reduces the scope for costly, construction contract.
time-consuming and distracting disputes. And where disputes do
Overall, therefore, NEC4 and FIDIC 2017 represent a drive towards
arise, they provide ways of resolving them that are quick, informal
proactive project management, regular engagement and dispute
and flexible. In short, they show the value in having a construction
avoidance, with each of those features being centrally embedded in
contract that is not consulted only once a problem has arisen.
the contract terms. The change is international but will not happen
everywhere overnight. It does, though, seem to be the direction of
travel.

David Nitek Nicholas Downing

Herbert Smith Freehills LLP Herbert Smith Freehills LLP
Exchange House, Primrose Street Exchange House, Primrose Street
London, EC2A 2EG London, EC2A 2EG
Tel: +44 20 7466 2453 Tel: +44 20 7466 2741

Email: david.nitek@hsf.com Email: nicholas.downing@hsf.com
URL: www.herbertsmithfreehills.com URL: www.herbertsmithfreehills.com
David is a partner at Herbert Smith Freehills, specialising in the Nicholas leads the non-contentious construction and engineering
resolution of construction and engineering disputes through practice in London at Herbert Smith Freehills, having over 30 years’
adjudication, dispute boards, litigation and arbitration. David advises experience of major construction and engineering projects in the
both employers and contractors in a variety of sectors, with a particular energy, infrastructure and real estate sectors.
focus on transport and other infrastructure projects. He has advised
He is a member of the Construction and Engineering Committee for
on disputes arising out of some of the UK’s largest infrastructure
the City of London Law Society. He is a UK correspondent for the
projects of recent years, and has extensive experience in the Middle
International Construction Law Review. Nicholas is recognised as
East, having previously worked in the firm’s Dubai office. David’s
being in the top tier of construction and engineering law practitioners
practice also involves the management of claims, in particular the
in the latest editions of Chambers UK and The Legal 500. He regularly
establishment of robust processes for reviewing and resolving claims
provides training to clients on NEC3/NEC4 and FIDIC.
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 is one of the world’s leading professional services businesses, bringing together the best people across our 27 offices, to
meet clients’ global legal service needs. The firm offers a top-tier seamless service across a single global platform and an unparalleled depth of
expertise. It provides access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of
industry sectors, including construction and infrastructure, energy, natural resources, technology and financial services.
The firm’s specialist construction and engineering team offers the full spectrum of legal services on all aspects of a project from procurement to
completion and our projects group advises clients throughout every stage of a project’s life cycle. On large-scale, long-term infrastructure, mining,
construction and engineering, and energy projects the firm offers innovative financing and bespoke contractual structures that allows clients to meet
their projects’ objectives. Having acted for parties on all sides of projects and transactions, the firm provides a unique and broad perspective on
deals and a strong understanding of the market overall.

Chapter 4
Australia Kon Nakousis
Clyde & Co Teodor Lomaca
■■ ABIC MW-2008 – Major Works Contract (standard contract

1 Making Construction Projects for non-housing work – except for QLD where MW-1 2003
is used);
1.1 What are the standard types of construction contract ■■ ABIC SW-2008 – Simple Works Contract (standard contract
in your jurisdiction? Do you have contracts which for non-housing work – except for QLD where SW-C 2011
place both design and construction obligations is used);
upon contractors? If so, please describe the types of ■■ ABIC BW-1 2002 – Basic Works Contract (works up to
contract. Please also describe any forms of design- AU$50,000); and
only contract common in your jurisdiction. Do you
■■ ABIC EW-1 2003 – Early Works Contract.
have any arrangement known as management
contracting, with one main managing contractor The International Federation of Consulting Engineers also produces
and with the construction work done by a series standard form contracts for civil engineering construction projects
of package contractors? (NB For ease of reference internationally.
throughout the chapter, we refer to “construction
contracts” as an abbreviation for construction and There are a number of other standard forms available through
engineering contracts.) industry associations, such as the Master Builders, along with public
authorities and government bodies (e.g. GC 21).
Standards Australia produces a number of standard form contracts
for use in Australia, which include: 1.2 Are there either any legally essential qualities needed
■■ AS 4000-1997 – General Conditions of Contract: construct- to create a legally binding contract (e.g. in common
law jurisdictions, offer, acceptance, consideration
only contract for major projects; and intention to create legal relations), or any
■■ AS 2124-1992 – General Conditions of Contract: civil specific requirements which need to be included in a
engineering, building, electrical, mechanical engineering construction contract (e.g. provision for adjudication or
contract; any need for the contract to be evidenced in writing)?
■■ AS 4902-2000 – General Conditions of Contract for Design

There are three essential qualities to create a legally binding contract
and Construct: imposes design and construct obligations on the
in common law jurisdictions such as Australia:
contractor;
1. an agreement;
■■ AS 4300-1995 – General Conditions of Contract for Design
and Construct: commercial design and construct contract; 2. consideration; and
3. an intention to enter into legal relations.
■■ AS 4915-2002 – Project Management: General Conditions;
For a valid agreement to form, an offer by one party needs to be
■■ AS 4916-2003 – Construction Management: General
accepted by the other. An invitation to tender is not considered as
Conditions;
an offer; submitting a tender will, however, be considered an offer:
■■ AS 4122-2010 – General Conditions of Contracts for Spencer v Harding [1870] LR 5 CP 561.
Consultants;
The offer or promise must be supported by consideration: Dunlop
■■ AS 4916-2002 – Construction Management General Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 at 853.
Conditions; and The terms of the agreement may be express or implied and may be
■■ AS 4917-2003 – Construction Management Trade Contract: partly written or partly oral; however, the terms must be sufficiently
General Conditions. certain in their operation to be enforced in a court of law: Elizabeth
In 2015, Standards Australia proposed to replace AS 4000-1997 Bay Developments Pty Ltd v Boral Building Services Pty Ltd [1995]
and AS 2124-1992 with a new standard, AS 11000. However, after 36 NSWLR 709. Certain contracts for the performance of domestic
conducting a process of stakeholder engagement, a decision was building work must be in writing.
made to cancel the project. Both AS 4000-1997 and AS 2124-1992 Questions of intention to enter legal relations may arise through
will continue to operate while further stakeholder consultation takes contract negotiations; for example, a situation may arise where
place. The Australian Building Industry contract suite also provides the parties have settled on key terms but have not yet agreed to be
a number of standard form contracts, including: bound by those terms (Ratto v Trifid Pty Ltd [1987]), although in the
context of construction contracts, this is unlikely.

Clyde & Co Australia
the various schemes are funded by either a levy on building and

1.3 In your jurisdiction please identify whether there is construction work (paid by the person for whom the work is being
a concept of what is known as a “letter of intent”, in performed) or a levy calculated on a percentage of wages paid by
which an employer can give either a legally binding or
the employer.
non-legally binding indication of willingness either to
enter into a contract later or to commit itself to meet (b) Labour
certain costs to be incurred by the contractor whether The Fair Work Act 2009 (Cth) (FWA) is the primary statute
or not a full contract is ever concluded.
Australia
regulating the employment of the majority of Australian employees
(note that it does not apply to some public sector employees).
Preliminary agreements, such as a letter of intent or heads of The FWA and related regulations establish minimum conditions of
agreement, are sometimes used to enable progress on a project while employment, and set out the rights of workers (including apprentices
the final terms are being negotiated. However, parties need to be and foreign workers) and the industrial relations obligations of most
clear as to the intention of the preliminary agreement and whether employers. Other employment matters such as health and safety,
parties intend for it to be legally binding: Masters v Cameron [1954] long service leave, regulation of apprentices and equal opportunity
91 CLR 353; Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] obligations are largely regulated by the States and Territories
NSWCA 227. (although in some circumstances Federal legislation may apply).
To prevent a preliminary agreement from becoming a contract, Foreign workers are required to hold a valid visa allowing them to
parties should include the terms ‘subject to contract’. work in Australia.
(c) Taxation
1.4 Are there any statutory or standard types of insurance Taxation is regulated by the Federal government. There are no
which it would be commonplace or compulsory to specific tax laws or regulations relating to construction workers.
have in place when carrying out construction work? However, workers who are required to live away from their normal
For example, is there employer’s liability insurance residence may be entitled to concessional tax treatment in the form
for contractors in respect of death and personal
of a living away from home allowance. The allowance is designed
injury, or is there a requirement for the contractor to
have contractors’ all-risk insurance?
to compensate the worker for the additional expenses incurred.
(d) Health and Safety
There are no ‘construction industry’-specific compulsory or statutory Legislation and regulations in each of the states and territories
insurances. Common insurances required under a construction impose rigorous obligations in relation to health and safety.
contract include: Obligations are imposed on persons conducting a business or
■■ professional indemnity insurance; undertaking, officers, workers and others including members of the
public who enter the site (duty holders). Duty holders are required to
■■ public liability insurance (for on- and off-site work);
ensure the health and safety of workers and other persons, so far as
■■ construction works insurance; reasonably practicable. The duties are concurrent and overlapping,
■■ transit insurances for the transport of items to be used on site; meaning that both the employer and contractor may hold the same
■■ property insurance for completed works, supplies on site and duty in relation to the same work. Legislation imposes consultation,
plant and equipment; cooperation and coordination obligations on each of the duty
■■ motor vehicle property insurance; and holders. Further, the duties are not transferable; a party cannot
contract out of their obligations. Additional obligations are imposed
■■ motor vehicle third-party property damage and personal injury
insurance. on principal contractors in relation to the management of building
and construction work.
General insurances required include workers compensation
Key obligations exist in relation to providing a safe workplace,
insurance along with motor vehicle third-party personal injury
plant and equipment, systems of work, information, instruction and
insurance for registered plant and motor vehicles.
training and supervision of workers. Penalties for failure to comply
with work health and safety legislation can result in significant
1.5 Are there any statutory requirements in relation financial penalties for both the organisation and individuals.
to construction contracts in terms of: (a) general Officers of an organisation who fail to comply with their personal
requirements; (b) labour (i.e. the legal status of those obligations face the additional penalty of a term of imprisonment.
working on site as employees or as self-employed
sub-contractors); (c) tax (payment of income tax of Each of the States and Territories excluding Victoria and Western
employees); or (d) health and safety? Australia adopted the Model Work Health and Safety legislation in
an effort to develop a nationally consistent system of regulation.
(a) General Requirements Western Australia is in the process of adopting the model laws.
Victoria has elected to maintain its current system of regulation.
In each of the States and Territories, domestic or residential building
work over a certain monetary value must be in writing, signed by the
parties and particularise the work to be undertaken. 1.6 Is the employer legally permitted to retain part of
the purchase price for the works as a retention to be
Security of Payment Legislation (SOPA) operates in each of the
released either in whole or in part when: (a) the works
States and Territories, prohibiting ‘pay when paid’ provisions in are substantially complete; and/or (b) any agreed
contracts and requiring progress payments to be made. Contract defects liability is complete?
clauses purporting to include ‘pay when paid’ provisions are
rendered void. Retention amounts are common practice under Australian
Portable long service schemes operate in each of the States and construction contracts to ensure proper performance of the contract.
Territories where workers continuously accrue long service leave Retention or security often takes the form of insurance bonds,
independent of the employer they are engaged by. The schemes retention funds and bank guarantees. Retention funds are generally
were designed to prevent a situation where workers would lose held as a percentage of progress payments up to an upper limit
any accrued entitlement when they changed employers. Each of (generally a percentage of the contract price).

A party may have access to the security where permitted under the
2 Supervising Construction Contracts
contract. Generally, the security may be called upon if the contractor
defaults under the construction project, to rectify defects during the
project or for the cost of rectification of defects during the defects 2.1 Is it common for construction contracts to be
liability period. supervised on behalf of the employer by a third
Queensland is the only jurisdiction that regulates security and sets party? Does any such third party (e.g. an engineer
or architect) have a duty to act impartially between
Australia
limits on the amount of retention monies, including the amounts that

contractor and employer? Is that duty absolute or is
may be deducted from progress payments to be held for security: it only one which exists in certain situations? If so,
Part 4A of the Queensland Building and Construction Commission please identify when the architect/engineer must act
Act 1991 (Qld). impartially.
1.7 Is it permissible/common for there to be performance Within Australia it is common for construction contracts to be
bonds (provided by banks and others) to guarantee supervised by a third party on behalf of the employer. Supervisors
performance, and/or company guarantees provided to are often known as the ‘superintendent’ or ‘principal representative’.
guarantee the performance of subsidiary companies?
The superintendent has an obligation to act in a fair, just, unbiased
Are there any restrictions on the nature of such bonds
and guarantees? and skilful manner when acting independently of the contractor
and employer; this may be express or implied: Perini Corp v
Commonwealth [1969] 2 NSWLR 530.
Bank guarantees are often used as security under construction
contracts, are typically unconditional, and can be called upon on However, in practice, the role and responsibilities of the
demand. Parent company guarantees are also common practice superintendent are dependent on the contract defining their duties.
whereby the parent company guarantees the performance of the The contract may also specify that the superintendent is an agent of
subsidiaries’ obligations under the contract. Alternatively, the the employer and thus impartiality is not required.
parent company may step into the shoes of the contractor to perform
its obligations under the contract. 2.2 Are employers entitled to provide in the contract that
Often a contract will impose conditions that must be first satisfied they will pay the contractor when they, the employer,
before a party can call upon a form of security. have themselves been paid; i.e. can the employer
include in the contract what is known as a “pay when
Courts will only restrain a beneficiary from calling on a performance paid” clause?
guarantee in limited circumstances, such as where the contract
between the parties clearly restricts the right to call on the guarantee: Employers are not entitled to pay contractors upon their own
Redline Contracting Pty Ltd v MCC Mining (Western Australia) Pty payment. Since 2009, all Australian jurisdictions have implemented
Ltd [2011] FCA 1337. SOPA, rendering ‘pay when paid’ clauses or similar provisions void.
Queensland is the only jurisdiction that imposes conditions
when calling on security: Queensland Building and Construction
2.3 Are the parties permitted to agree in advance a fixed
Commission Act 1991 (Qld). sum (known as liquidated damages) which will be
paid by the contractor to the employer in the event of
1.8 Is it possible and/or usual for contractors to have particular breaches, e.g. liquidated damages for late
retention of title rights in relation to goods and completion? If such arrangements are permitted, are
supplies used in the works? Is it permissible for there any restrictions on what can be agreed? E.g.
contractors to claim that until they have been paid does the sum to be paid have to be a genuine pre-
they retain title and the right to remove goods and estimate of loss, or can the contractor be bound to
materials supplied from the site? pay a sum which is wholly unrelated to the amount of
financial loss suffered?
Contract clauses purporting to retain title over goods until payment

Parties are permitted to agree in advance on liquidated damages in
is made by the employer are common practice – see Aluminium
the event of particular breaches subject to some restrictions. The
Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] WLR 676
predominant restriction is that the liquidated damages cannot be a
– however, if the materials or goods have been fixed in position and
penalty. Liquidated damages will be considered a penalty if they
incorporated into the project as part of permanent works, title rights
are ‘extravagant and unconscionable’ or a set amount that does not
in relation to those goods will transfer to the employer rendering the
consider the degree of the breach: Dunlop Pneumatic Tyre Company
clause ineffective: Otis Elevator Co Pty Ltd v Girvan (Qld) Pty Ltd
Limited v New Garage and Motor Company Limited [1915] AC 79.
(QSC 23 August 1990).
Most construction contracts calculate damages as an amount for
Retention of title clause gives rise to a ‘security interest’ as
every day that a prerequisite is not met under the contract, and
defined under the Personal Property Securities Register Act 2009
therefore proportionate to the loss suffered.
(Cth), which created a national scheme for registration of security
interests. In order for the security interest to be effective, it needs Further liquidated damages have to be a genuine pre-estimate of the
to be registered. cost of the loss when considering the parties’ knowledge at the time
of the agreement: Esanda Finance Corporation v Plessnig [1989]
166 CLR 131. Liquidated damages are commonly sought for delays
in completion of the contract or for failure to meet previously agreed
performance standards.

that is necessary to secure performance of the contract: Secured

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

risks (e.g. inclement weather or industrial activity), this ‘float’ time

is a buffer and risk management tool for the benefit of the contractor. 3.9 Who usually owns the intellectual property in relation
to the design and operation of the property?
In situations where a contract provides that an extension of time or
variation will be granted only if the delay affects the achievement
Section 35(2) of the Copyright Act 1968 (Cth) (Copyright Act)
of completion by the contract completion date, then the effect is
provides that, largely, the author of the work retains ownership
that the float has to be used prior to an extension of time being due.
of copyright. In circumstances where the obligations of the
Australia
Australian courts are reluctant to imply an obligation on either the author’s employment under either a contract of service (or even
principal or the contractor to preserve the float and/or achieve the apprenticeship) required the carrying out of the design work,
target completion date. This obligation would arise only if it were section 35(6) provides that the owner of the copyright is in fact the
expressed as a term of the contract: Glenlion Construction Limited v employer.
The Guinness Trust [1987] 39 BLR 89.
It is important to note that a party does not necessarily need to be
Under the drafting of many of the Australian standard form contracts, the copyright owner in order to make use of the copyright material.
the contractor owns the float. Accordingly, the contractor will be Certain associated rights can be licensed (either expressly or
entitled to an extension of time for the effect of a risk event caused impliedly) by the owner of the copyright. For example, there is an
by the principal (e.g. the variation) on the target date for completion, implied licence in favour of the owners of land to use architectural
even though this may not delay achievement of completion beyond drawings and plans for the purpose they were contracted for. This
the contractual date for completion. implied licence also generates an implied consent in favour of
the successors in title: Concrete Pty Ltd v Parramatta Design &
3.6 Is there a limit in time beyond which the parties to Developments Pty ltd [2006] 229 CLR 577.
a construction contract may no longer bring claims Exclusion or modification of these general rules is possible by
against each other? How long is that period and from
agreement (section 35(3)), including by way of an assignment at
what date does time start to run?
law (section 196(1)).
The time limit for bringing a claim for breach of contract is, generally
speaking, six years, such period beginning on the date of the breach 3.10 Is the contractor ever entitled to suspend works?
(e.g. section 14 Limitations Act 1969 (NSW)) (Limitations Act).
The time limit is extended to 12 years in circumstances where the There is no common law right to suspend works for any reason. In
contract is made under a deed (e.g. section 16 Limitations Act). the event that there is suspension without sufficient lawful cause, the
The majority of the standard form construction contracts contain suspension can entitle the innocent party to claim that the contract
provisions relating to a ‘final certificate’ (Final Certificate). The has been repudiated by the unlawful party and to terminate the
Final Certificate is to be issued at the completion of a project and contract on the basis of said repudiation: Foran v Wight [1989] 168
deals with all claims which arise from or in relation to the contract. CLR 385.
The Final Certificate is also often used, with some exceptions, as A limited right to suspend the work without terminating the contract
evidence of compliance with the contract and some claims may is provided for in the standard form contracts, or in cases where the
be extinguished depending on the express wording of the Final employer directs suspension of the works as a result of default. In
Certificate. all Australian jurisdictions, a claimant under the SOPA legislation
has a statutory right to suspend works in circumstances where
money is due and payable as a result of an unpaid claim.
3.7 Who normally bears the risk of unforeseen ground
conditions?
3.11 On what grounds can a contract be terminated? Are
Except for where the matter is addressed expressly, the contractor there any grounds which automatically or usually
will bear the risk where the completion of the project is made more entitle the innocent party to terminate the contract?
Do those termination rights need to be set out
problematic by unexpected ground conditions: Pearce v Hereford expressly?
Corporation [1968] LGR 747; Thiess Services Pty Ltd v Mirvac
Queensland Pty Ltd [2006] QCA 50.
Three circumstances give rise to a right to terminate a contract
Several of the Australian standard form contracts enable the at common law: Koompahtoo Local Aboriginal Land Council v
employer and contractor to share the risk between them. In these Sanpine Pty Ltd [2007] 233 CLR 115. These are:
provisions, where conditions are such that they would not have been
■■ where the term breached is a ‘condition’ or an essential term
foreseen when the project was tendered for, the contractor will be of the contract;
able to claim an extension of time where delays occur and also claim
■■ where the term breached is ‘intermediate’ in nature but it is a
for the extra costs incurred in order to bring the project to completion
serious breach with serious consequences; and
that have arisen as a result of the unanticipated conditions.
■■ repudiation.
In circumstances where misleading or deceptive information was
The right to terminate on any of these grounds exists regardless
provided by a party prior to contract, the Australian Consumer
of any termination provisions embodied in the contract, unless the
Law (schedule 2 if the Competition and Consumer Act 2010 (Cth))
termination clause expressly excludes the common law rights and
(Australian Consumer Law) may provide a remedy.
is a ‘code’ or complete statement of circumstances in which the
contract can be terminated.
3.8 Who usually bears the risk of a change in law
Repudiation occurs when one party evinces a clear intention to no
affecting the completion of the works?
longer be bound by the contract or only to perform the contract in
such a way that it is substantially inconsistent with the fundamental
The majority of Australian standard form contracts may allocate the
obligations of that party: Shevill v Builders Licensing Board
risk of a change in law to the employer.
[1982] 149 CLR 620. The required intention will be determined

objectively but can be established by the parties’ words, conduct or obligations will be discharged: Codelfa Construction Pty Ltd v State
actual inability to perform: Sunbird Plaza Pty Ltd v Maloney [1988] Rail Authority (NSW) [1982] 149 CLR 337. While the common
166 CLR 245. In order to terminate the contract, the innocent party law position is that loss resulting from a frustrating event lies where
must accept the repudiation. In the case of construction contracts, it falls, some Australian jurisdictions have altered this position with
repudiation notably gives the contractor an opportunity to seek legislation.
damages for loss of bargain, or alternatively, recover on a quantum
meruit basis.
Australia
3.13 Are parties which are not parties to the contract
Both parties are discharged from the obligation of further entitled to claim the benefit of any contract right
performance following termination of the contract although all which is made for their benefit? E.g. is the second or
accrued rights and obligations remain: Southern Han Breakfast subsequent owner of a building able to claim against
Point Pty Ltd (in Liquidation) v Lewence Construction Pty Ltd the original contracts in relation to defects in the
building?
[2016] HCA 52.
Separately, express rights of termination may also be provided
The position at common law is that there is no entitlement for an
for in the contract, detailing which breaches are of such a serious
individual to claim the benefit of a construction contract if they are
nature as to entitle the party to terminate the contract or otherwise,
not in fact a party to that contract. This stance has been modified
providing a cure regime, for example, when a contractor is no
by legislation in the Northern Territory, Queensland and Western
longer in compliance with the contract programme. In these cases,
Australia.
either party may issue a show cause notice, which would specify a
deadline by which the breach must be rectified. Therefore, the original building contract cannot be enforced by any
subsequent owner. It is the case, however, that a subsequent building
In addition, the contract may make provision for termination for
owner may be owed a duty of care by the builder to avoid pure
convenience without default of either party. Reliance on such clauses
economic loss (which includes defective work and/or materials).
may depend on the right being exercised in good faith, but this will
Generally speaking, the courts will not foist such a tortious duty
turn on the terms of the contract itself: Apple Communications v
of care in circumstances where the injured party was reasonably
Optus Mobile [2001] NSWSC 365; Sundararajah v Teachers
capable of taking steps to protect themselves, for example, by
Federation Health Ltd [2009] NSWSC 1443.
controlling the physical events which lead to the loss, obtaining
contractual warranties in respect of the standard of work and
3.12 Is the concept of force majeure or frustration known materials used or notably, obtaining insurance against the economic
in your jurisdiction? What remedy does this give loss which had been suffered: Woolcock Street Investments Pty Ltd
the injured party? Is it usual/possible to argue v CDG Pty Ltd [2004] 216 CLR 515; Brookfield Multiplex Limited v
successfully that a contract which has become
Owners Corporation Strata Plan 61288 [2014] 254 CLR 185.
uneconomic is grounds for a claim for force majeure?
Although a doctrine of force majeure does not exist in Australian 3.14 Can one party (P1) to a construction contract which
law, the incorporation of a force majeure clause in a construction owes money to the other (P2) set off against the sums
due to P2 the sums P2 owes to P1? Are there any
contract is often seen. The clause makes provision for the allocation
limits on the rights of set-off?
of risk in circumstances where the performance of the contract
becomes impossible due to supervening events beyond the control
The existence of a right to set-off turns on the provisions of the
of the parties. It can be said that reliance on such clauses is
individual contract in question. The terms of contract must
more frequent and extensive than on the common law doctrine of
demonstrate a clear intention to allow an employer to withhold any
frustration.
monies from a certified amount under the contract for any such right
The effect of a force majeure clause is normally that the affected to be rightfully and lawfully exercised: Leighton Contractors Pty
party’s obligations to perform the contract will be suspended in Ltd v East Gippsland Catchment Management Authority [2000] VSC
the event of a force majeure event. The clause also often provides 26.
that either party may acquire the right to terminate the contract in
circumstances where the effects of the force majeure event continue
for a pre-established duration. The fact that the contract has become 3.15 Do parties to construction contracts owe a duty of
care to each other either in contract or under any
more expensive (or impractical) to perform is usually not in and
other legal doctrine?
of itself a force majeure event: Gardiner v Agricultural and Rural
Finance Pty Ltd [2007] NSWCA 235.
There are a number of implied duties owed to an employer under a
A frustrated contract, on the other hand, is a contract which, following contract, additional to those duties expressly stated in the contract.
its formation, and without default by either party, is incapable of being These implied duties are:
performed due to an unforeseen event, resulting in the obligations
1. to carry out and complete work in a careful and competent
under the contract being radically different from those contemplated
manner, in accordance with the law and within a reasonable
by the parties at the time of contracting: Codelfa Construction time;
Pty Ltd v State Rail Authority (NSW) [1982] 149 CLR 337. The
2. to ensure that any materials supplied are of a good and
establishment of frustration of contract is not without its challenges,
acceptable quality and reasonably fit for the purpose for which
and will not be found in circumstances where the occurrence of the they are required; and
particular event was foreseen by the parties or made provision for
3. to ensure that any dwelling constructed is reasonably fit for
in a force majeure clause: Davis Contractors Limited v Fareham
habitation.
Urban District Council [1956] AC 969.
In addition to any contractual obligations, a duty of care to prevent
The effect of frustration of a contract is not that the contract will
personal injury, to prevent damage to property and, in some cases,
be void from its commencement, but instead will be automatically
to avoid pure economic loss may be owed.
terminated at the point of the frustrating event and all future

Where the contractor or subcontractor has acted negligently, the

law undoubtedly permits the persons injured or whose property has 3.18 Where the construction contract involves an element
been damaged to hold those contractors liable, even in cases where of design and/or the contract is one for design only,
are the designer’s obligations absolute or are there
there have been subsequent post-completion failures or accidents limits on the extent of his liability? In particular, does
which have been caused by that same negligence. A contractor, the designer have to give an absolute guarantee in
under express terms, will ordinarily indemnify the employer for any respect of his work?
claims for personal injury or property damage which arise as a result
Australia
of the contractor carrying out the work. The imposition of a tortious In the absence of any express modification in the contract, at
duty of care to avoid pure economic law is, however, less easily common law, a designer must exercise reasonable care and skill
ascertained. On the whole, the courts are less likely to impose such in undertaking any design duties: Voli v Inglewood Shire Council
a duty of care where the injured party was easily capable of taking [1963] 110 CLR 74. The standard applied is that of a reasonably
the necessary steps to either control the events which gave rise to competent person exercising that particular skill: Mutual Life &
the loss or by obtaining contractual warranties in respect of the Citizens’ Assurance Co Ltd v Evatt [1970] 122 CLR 628.
standard of work and materials used or, notably, obtaining insurance
Professional Standards Acts operate in all Australian jurisdictions
against the economic loss which had been suffered: Woolcock Street
and permit the limitation of liability of professionals under approved
Investments Pty Ltd v CDG Pty Ltd [2004] 216 CLR 515; Brookfield
schemes.
Multiplex Limited v Owners Corporation Strata Plan 61288 [2014]
254 CLR 185. Proportionate liability legislation also exists in all Australian
jurisdictions, facilitating limitation of the liability of a party to
reflect their proportion of the responsibility, in circumstances where
3.16 Where the terms of a construction contract are
their negligence has caused economic loss, combined with the
ambiguous, are there rules which will settle how that
ambiguity is interpreted? actions of other parties.
The objective intent of the parties is used to settle any ambiguity in 4 Dispute Resolution
a contract. This means that the terms of the contract are interpreted
in the way that a reasonable person would take them to mean.
Ordinarily, this involves consideration of the actual text of the 4.1 How are disputes generally resolved?
contract but also the context within which the parties came to agree
the contract, including their knowledge at the time and the drive In the construction industry, disputes are often resolved in accordance
and objective for making the agreement: Newey v Westpac Banking with pre-agreed processes. Construction contracts generally provide
Corporation [2014] NSWCA 319; Mount Bruce Mining Pty Ltd v for a sequenced dispute resolution process. This process varies from
Wright Prospecting Pty Ltd [2015] 256 CLR 104. contract to contract, but will usually mandate some combination of
The courts have taken to considering the surrounding circumstances the following steps: a conference between the parties; mediation;
in order to unravel any ambiguity. But, it should be noted that this arbitration; and expert determination. Usually, these steps are taken,
does not extend to considering the parties’ subjective intentions or required to be taken, before the parties litigate in court. These
at the time of contract and evidence of this, or prior negotiations dispute resolution clauses are generally enforceable provided they
between the parties is inadmissible. are drafted with sufficient clarity and certainty. Even if the contract
does not require the parties to engage in these dispute resolution
There is uncertainty in Australian law as to whether courts can have
processes, parties often opt to engage in these processes to avoid the
regard to the factual matrix where the terms of a clause disclose
cost and hassle of court proceedings.
no apparent ambiguity: Western Export Services Inc v Jireh
International Pty Ltd [2011] 282 ALR 604; Technomin Australia Pty With respect to court proceedings, building and construction disputes
Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA are generally resolved in State and Territory courts. The litigant’s
164 (S). choice of court is generally determined by the availability of the
remedy being sought (for example, the amount of compensation
sought).
3.17 Are there any terms in a construction contract which
are unenforceable? In addition to the above processes, each State and Territory has
legislated to create a ‘security of payment’ regime. It is common for
parties to make use of these regimes to resolve (at least temporarily)
Per question 2.3 above, penalties are unenforceable.
payment disputes. These statutory regimes allow persons who
While there are no other specific provisions in a contract which are provide construction work (and/or related goods and services) to
unenforceable, it is possible that the contract as a whole may be recover staged payments (known as ‘progress payments’). The
determined by a court to be unconscionable under the Australian security of payment regimes were designed to ensure that parties
Consumer Law. who perform construction work have an enforceable right to interim
There may also be circumstances where contractual provisions payment despite clauses in construction contracts that purport to
which attempt to contract out of certain legislative requirements are limit or block the ability of parties to recover payments. If the parties
held to be unenforceable. For example, section 44 of the Security disagree on the right to, or quantum of, a progress payment, the
of Payment Act 2009 (Act) provides that it is prohibited for a party security of payment regimes allows for an expedited adjudication
to attempt to ‘contract out’ of compliance with the Act and the process whereby an independent adjudicator determines the
provisions will be deemed void which are inconsistent with the entitlement to, and quantum of, the progress payment due.
Act or have ‘the effect of excluding, modifying or restricting’ the
operation of the Act. Other states have similarly worded provisions
in their equivalent legislation.

International Commercial Arbitration. International commercial

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

However, the foreign judgment will not be enforced at common law First instance
when the foreign judgment was obtained by fraud, when there was In general, proceedings are usually commenced by way of a written
a denial of natural justice, where enforcement would be contrary to application (or ‘originating process’) which is filed in the court and
public policy or where the judgment is penal or financial in nature. served on the defendant. The defendant may then file and serve a
Further, some Australian courts can use their inherent equitable response. These documents serve to set out the nature and facts
jurisdiction to give effect to foreign judgments without requiring of the dispute and to narrow the relevant issues for the court’s
that the foreign judgment be made a judgment of the forum court.
Australia
determination. Parties are then required to prepare and serve their

Enforcement pursuant to the Foreign Judgments Act 1991 (Cth) evidence. This may involve seeking an order for discovery from
The Foreign Judgments Act 1991 (Cth) allows registration of the court. Parties will then compile legal submissions which will
judgments from both superior and inferior courts of proclaimed be filed with the court and served on the other party. The dates for
places. A judgment creditor is able to apply for registration of these steps can be agreed by the parties or mandated by the court.
a foreign judgment in the Supreme Court of a State or Territory. Proceedings culminate with a trial before one or more judges, who
In order for a foreign judgment to be registered, the following then proceed to write and issue a judgment which decides the issues
requirements must be satisfied: between the parties. The time between the trial and the handing
down of the judgment can vary greatly (from days to months).
1. the application for registration of the foreign judgment must be
made within six years of the date of judgment or (where there Proceedings can vary in total duration (from months to years)
have been proceedings by way of appeal against the judgment) depending on a range of factors such as the complexity of the issues,
the date of the last judgment in those proceedings; the volume of evidence required to be prepared and adduced, the
2. the foreign judgment must be an ‘enforceable money occurrence of interlocutory disputes, the preparedness of the parties
judgment’; and the nature and complexity of the trial. Some Australian State
3. the enforceable money judgment must be final and conclusive; courts have special building and construction lists (for instance,
and the Technology and Construction List in the Equity Division of the
4. the enforceable money judgment must be given by a court of a New South Wales Supreme Court), which seeks to facilitate quicker
country to which the Act extends. resolutions of such disputes.
Once these requirements have been satisfied, the court must order Appeal
registration of the foreign judgment. On registration in the Supreme In some circumstances, a party may have a right to appeal a decision
Court, a foreign judgment has the same force and effect as a judgment of a court. In other circumstances, the party will be required to
of that court and is deemed to be made on the date of registration obtain leave (permission) of the appellant court to appeal a decision
(which is taken to be the date of the court’s order). The foreign of a lower court. The availability and scope of a party’s right to
judgment can be enforced by all the normal processes of execution appeal will depend on a number of factors including the nature of
available in that court. Note there are a number of grounds on which the proceedings and the rules of relevant courts.
a judgment debtor can apply to have the registration of the foreign
Generally, a party only has a short period (generally within 28 days)
judgment set aside.
in which to lodge an appeal. The process to make an appeal varies
depending on the relevant court rules, but it often involves filing a
4.6 Where a contract provides for court proceedings in notice of appeal. If a party fails to make an appeal in time, they may
your jurisdiction, please outline the process adopted, lose their ability to make an appeal.
any rights of appeal and a general assessment of
how long proceedings are likely to take to reduce: (a)
The time between the lodging of the appeal and the decision of the
a decision by the court of first jurisdiction; and (b) a appellant court varies greatly depending on the complexity of the
decision by the final court of appeal. matter. However, given the appellant court’s role is generally more
limited (especially in relation to fact-finding) than the court of first
The process, rights of appeal and duration of proceedings can vary instance. Thus an appeal court is generally able to hand down a
greatly based on the nature of the proceedings and the particular court judgment faster than a court of first instance.
that the proceedings are brought in. Disputes in the construction
industry are generally resolved in State or Territory courts rather
than Federal courts.

Kon Nakousis Teodor Lomaca

Clyde & Co Clyde & Co
L15, 333 George Street L15, 333 George Street
Sydney, NSW, 2000 Sydney, NSW, 2000
Australia Australia
Tel: +61 2 9210 4416 Tel: +61 2 9210 4931
Australia
Fax: +61 2 9210 4599 Fax: +61 2 9210 4599
Email: kon.nakousis@clydeco.com Email: teodor.lomaca@clydeco.com
URL: www.clydeco.com URL: www.clydeco.com
Kon specialises in construction and engineering law with a focus Teodor is an experienced front-end construction lawyer, with significant
on infrastructure, building, rail, energy and resources and acts for expertise in public-private partnerships, drafting and negotiating
some of the leading participants in those sectors. Kon has an acute commercial agreements, identifying suitable project delivery methods,
understanding of the array of complex technical, legal and commercial conducting extensive risk analysis and undertaking general contract
issues that underpin successful project delivery. administration. He has acted for both government and contractors
throughout the life cycle of a project, and has a strong understanding
He is experienced in providing strategic advice to market participants
of differing stakeholder imperatives.
on the structuring, negotiation, drafting and administration of contracts
across a broad range of projects across Australia, including residential Teodor currently advises a diverse range of clients on D&C, O&M, CM,
and commercial developments, roads, bridges, airports, sporting procurement and JV/alliance agreements, as well as subcontractor
facilities, and process and power plants. management.
Kon also has extensive experience in dispute resolution including
expert determination, litigation and arbitration. Having previously
worked at another leading Australian law firm, Kon is recognised as
a rising star, particularly due to his track record in negotiating early
and cost-effective resolution of major disputes, utilising alternative
dispute resolution mechanisms where necessary. Doyles recently
named Kon as a ‘Leading Construction & Infrastructure Litigation
Lawyer – Australia’ in its 2017 guide. He was previously listed as a
‘Recommended Construction & Infrastructure Lawyer – Sydney’ in its
2016 guide.
Clyde & Co is an international law firm with a pioneering heritage and a resolute focus on its core sectors of aviation, energy, healthcare, infrastructure,
industrials, insurance, marine, professional practices, shipping and trade. With over 2,000 lawyers operating from 46 offices and associated offices
across six continents, the firm advises corporations, financial institutions, private individuals, and governments on a wide range of contentious and
transactional matters. Clyde & Co has a particularly strong track record in complex cross-jurisdictional disputes and an outstanding reputation in
international arbitration.
We are distinguished by our focus on insurance, with over 340 partners and over 1,000 lawyers specialising either wholly or materially in this sector
alone. The firm offers insurers and reinsurers the opportunity to source legal advice from one law firm across many jurisdictions and across a wide
spectrum of business lines, including: aviation & aerospace; construction & engineering; corporate insurance services; employment practices liability;
energy; financial institutions and D&O; marine; mining, industrials & power; personal injury (including disease, EL/PL, motor, clinical negligence,
catastrophic loss, and fraud); product liability & recall; professional indemnity; property; reinsurance; and specialty (including accident & health,
bloodstock, contingency, cyber, fine art, kidnap & ransom, political risk & trade credit, product recall, specie & jewellers’ block and surety).
We are frequently recognised for our leading insurance expertise. For example, we were named “Insurance Law Firm of the Year” at the Reactions
London Market Awards in 2013 and 2012, and we have been recognised as “Insurance & Reinsurance Law Firm of the Year” by Who’s Who Legal
for the last four years (2015, 2014, 2013 and 2012) and UK Insurance Firm of the Year 2015 by The Legal 500. The firm was named “Firm of the
Year” in 2016 by The Lawyer.

Chapter 5
Belarus Ivan Martynov
SBH Law Office Vitaly Tvardovskiy
1 Making Construction Projects 1.2 Are there either any legally essential qualities needed
to create a legally binding contract (e.g. in common
1.1 What are the standard types of construction contract and intention to create legal relations), or any
in your jurisdiction? Do you have contracts which specific requirements which need to be included in a
place both design and construction obligations construction contract (e.g. provision for adjudication or
upon contractors? If so, please describe the types of any need for the contract to be evidenced in writing)?
contract. Please also describe any forms of design-
have any arrangement known as management Belarusian contract law does follow the continental doctrine of
contracting, with one main managing contractor offer and acceptance; however this is of little practical importance
and with the construction work done by a series due to the requirement for construction-related contracts to be
of package contractors? (NB For ease of reference written documents signed by both parties (see below). Courts will
presume that offer and acceptance have occurred once there is such
contracts” as an abbreviation for construction and
engineering contracts.) a document. Intention to create legal relations is also presumed
provided the “material conditions” requirements are met (see
below).
Belarusian law provides for several types of construction-related
contracts. The main types are: However, there are certain specific pre-conditions which affect the
1. contracts for construction works; validity and enforceability of construction contract.
2. contracts for design and survey works and contracts for Such pre-conditions can be grouped as follows:
designers’ supervision; 1. Requirements of form.
3. engineering services contracts, where the following sub- 2. Requirements of content.
types exist:
3. Compliance requirements for the employer and the contractor.
a. contracts for technical supervision services, which are
4. Tendering requirements.
largely similar to quantity surveyor services, as they are
termed in other jurisdictions; and Requirements of form
b. other engineering services, including general site All types of construction contracts mentioned in response to
management; and question 1.1 must be in writing. Contracts for construction works,
4. pooled investment real estate development (“dolevoye as well as contracts for design and survey works, must be executed
stroitelstvo”) contracts, where the developer raises funds from as “one document”, meaning that they must exist as a document
a pool of investors subject to the undertaking to provide each signed by both parties.
investor with a specific part of the property. The developer then
contracts with the designers, the construction contractors, et al. This means that construction contracts made by correspondence or
any other exchange of documents signed by one of the parties will
A specific contract form is provided by the law only for pooled
run afoul of this requirement. Where this occurs, the contract is
investment in residential and related properties.
not invalidated, but the parties may not rely on witness testimony
For other types of construction-related activities, no specific forms to prove the existence of such a contract and the content of its
as such are prescribed; however, strong requirements exist for so- conditions.
called “material conditions”, which the contracts must contain,
Requirements of content
often in specific forms, under the pain of nullity of the contract.
As mentioned above, contracts must include “material conditions”
Yes, a single contract may contain both design and construction
as provided by the law. If this requirement is not met, the courts
obligations.
may not enforce a construction contract. Lately, the practice of the
Yes, it is possible for the employer to sign a general construction courts has become more flexible in this respect and the courts in
contract and a contract for engineering services for the general many cases consider whether a contract lacking material conditions
management of construction activities and thereby appoint a general is executory or executed. If the lack of specific material conditions
contractor and an engineering company who will be completely does not per se limit the court’s ability to enforce an executed
responsible for the eventual delivery of the project. However, contract, in many cases the courts will consider the respective claim
please note that certain key functions will, in any event, remain with for enforcement on its merits.
the employer.

SBH Law Office Belarus
The list of material conditions in construction contracts is very The law does provide for mandatory insurance for industrial
wide: scope of work; starting and completion dates; pricing; accidents and work-related medical conditions for employees.
payment; procedure for the certification of works; and even specific Companies which operate equipment and facilities which are
requirements for how the details of the parties are given in the classed as presenting an industrial hazard are required to insure risks
contract. related to the operation of such.
Compliance requirements for the employer and the contractor
The law sets certain pre-conditions which the employer and the 1.5 Are there any statutory requirements in relation
Belarus
contractor must satisfy prior to entering into a construction contract. to construction contracts in terms of: (a) general
requirements; (b) labour (i.e. the legal status of those
For the employer, these pre-conditions include, among others: working on site as employees or as self-employed
possession of construction and design permits; specific evidence of sub-contractors); (c) tax (payment of income tax of
rights to the land; design documentation where the contract does employees); or (d) health and safety?
not provide that this should be developed by the contractor; and
compliance with licensing requirements when these exist for the For most projects, the employer is required to first commission a
employer, et al. “pre-investment study”, which is directed at the evaluation of the
For the contractor, these pre-conditions are as follows: compliance architectural, engineering and financial feasibility of the project and
with licensing (attestation) requirements for the contractor and its the assessment of its environmental impact. A decision to proceed
personnel. with the project must be taken with regard to the study.
Where these pre-conditions are not observed, the contract may be Another general requirement is the attestation of companies involved
invalidated as a contract made in violation of the law upon a claim in construction activities. This includes the employer, designers,
from a party with locus standi. all contractors and providers of engineering services. Attestation
involves verification of compliance with multiple requirements,
Similar pre-conditions exist for design and designers’ supervision
including the qualification of employees, health and safety, as well
contracts.
as quality management policies, certification of works and services,
Tendering requirements financial standing, availability of necessary equipment, staff, etc.
A vast majority of projects, which were started before 23 February Employers may be exempted from attestation if they retain an
2018, were subject to mandatory tendering. Starting from the said engineering company for “comprehensive management” of the
date, these rules apply only to projects which are funded from the construction project.
Republican or local budgets, or which are funded by loans secured Note that, starting from 23 February 2018, employers are exempted
by guarantees from the Republican or local government entities. from attestation in regard to certain refurbishment works and capital
Furthermore, even if such government-funded or funding secured maintenance works. Furthermore, the list of what qualifies as
by the government is present, mandatory tendering rules do not “construction activities” and thus entails the need for attestation is
apply to emergency repair or recovery work. also substantially reduced.
Prior to the start of any construction project, the employer must take
1.3 In your jurisdiction please identify whether there is out construction and design permits in respect of that project. Please
a concept of what is known as a “letter of intent”, in note that, prior to the 23 February 2018, two types of construction
which an employer can give either a legally binding or permits were required: the permit to construct; and the permit for the
non-legally binding indication of willingness either to performance of construction and installation works. The latter was
enter into a contract later or to commit itself to meet issued after the employer has entered into a construction contract
certain costs to be incurred by the contractor whether
and the design development (Stage A design) was completed. Only
after the issuance of that latter permit the actual construction works
could begin. After the said date, this requirement does not apply.
There is no legal concept of an LoI. While such letters may be sent In order to begin construction works, the employer must now only
by employers to contractors, they do not have any legal significance. notify the relevant government authority to begin the construction
works, provided that Stage A design has passed mandatory
1.4 Are there any statutory or standard types of insurance government review.
which it would be commonplace or compulsory to Furthermore, starting from 23 February 2018, no construction
have in place when carrying out construction work?
permits are required for certain refurbishment works as well as
For example, is there employer’s liability insurance
capital maintenance works.
injury, or is there a requirement for the contractor to Health and safety, as well as other labour-related requirements
have contractors’ all-risk insurance? (duration of a working day, length of rest periods, life and health
insurance, protective equipment and measures and wages) are all
Yes, a construction contractor, upon completion of construction of regulated in accordance with existing labour laws and construction
residential and various types of social or community properties, is regulations. The contractor is vicariously liable for its employees.
required to provide the employer with a security for the performance Contractors, as with all other companies, are required to withhold
of the contractor’s obligations of rectification of defects. One such from the employees’ wages and pay the following:
possible type of security is insurance of the contractor’s liability. ■ income tax at 13% of the wages paid and most fringe benefits
Otherwise, the law does not have any insurance requirements. provided to employees; and
However, contractors may voluntarily insure constructions risks. ■ a social security contribution of 1% of the wages paid and
The policies used by most insurance companies are largely based most fringe benefits provided to employees.
on Munich Re rules. The average insurance premium ranges from
Beyond that, contractors, again as with all companies, are required
0.1% to 0.4% of the value insured. Other voluntarily used insurance
to pay (without withholding) an employers’ social security
types in the industry include insurance of liability for damage caused
contribution, which is, in most cases, equal to 34% of the total
by defective work and services and general civil liability insurance.
payroll and total fringe benefits provided to employees.

company to supervise the construction process and/or as a site

1.6 Is the employer legally permitted to retain part of supervisor (technical supervisor). As mentioned above (see
question 1.6), in most cases an engineering company is appointed
are substantially complete; and/or (b) any agreed for “comprehensive management” of the construction project when
defects liability is complete? the employer does not have the attestation for the construction
activity.
This practice recently began to take hold, and contractors are There are no direct legal provisions which require the technical
Belarus
accepting retention conditions for projects they find attractive. The supervisor to act impartially. However, in the event of an unjustified
legal treatment of such conditions by the courts is inconsistent. suspension, the parties to the construction contract are entitled to
The law directly provides for a similar measure, but the retention claim any resulting damages and losses to them from the engineering
money in this case is held in a separate bank account of the contractor. company and the specific person who gave the instructions to
Under this rule, the contractor in a project for construction of suspend the works.
residential and various types of social or community properties must
provide the employer with one of the following: 2.2 Are employers entitled to provide in the contract that
■ a reserve of 1.5% of the cost of the works actually performed they will pay the contractor when they, the employer,
for the duration of the warranty period in a separate bank have themselves been paid; i.e. can the employer
account. Regular transfers from this account are not permitted include in the contract what is known as a “pay when
and the funds may only be used in the manner provided for in paid” clause?
the law;
■ a bank guarantee; or “Pay when paid” clauses are not recognised by Belarusian law.
■ insurance for his liability for default or defective performance
of his duties in the course of the warranty period.
The funds reserved in the separate account may be used by the sum (known as liquidated damages) which will be
contractor only to finance the works needed for the rectification of paid by the contractor to the employer in the event of
defective work. The law also provides a schedule for the release of particular breaches, e.g. liquidated damages for late
the reserved funds and the treatment of the funds in the event of the completion? If such arrangements are permitted, are
contractor’s insolvency. there any restrictions on what can be agreed? E.g.
does the sum to be paid have to be a genuine pre-
estimate of loss, or can the contractor be bound to
1.7 Is it permissible/common for there to be performance pay a sum which is wholly unrelated to the amount of
bonds (provided by banks and others) to guarantee financial loss suffered?
performance, and/or company guarantees provided to
Are there any restrictions on the nature of such bonds Yes, this is possible, subject to certain conditions. First, these
and guarantees? amounts are not treated as “liquidated damages”, but rather as
contractual penalties. The parties to the contract can foresee any
Performance bonds provided in the form of bank and/or company penalties in a fixed amount, which must be paid in case of a default
guarantees are permissible, but rarely used except in particularly or defective performance of an obligation, in particular in the case of
massive projects. This is because few contractors can afford such a delay in performance. However, in contractual practice delays are
securities, mostly due to the high cost of funds. The law directly normally subject to penalties estimated as a percentage of the total
provides for bank guarantees for some types of projects (see the value of the works paid on a “per day of delay” basis. However,
answer to question 1.6 above). No particular restrictions on the fixed penalties are widely used to deter a contract party from other
nature of bonds and guarantees exist. types of breach of contract. The party entitled to such penalties is
not required to prove the damages caused, so such penalties can be
unrelated to the amount of losses.
1.8 Is it possible and/or usual for contractors to have
retention of title rights in relation to goods and Importantly, the default position under the law is that damages may
supplies used in the works? Is it permissible for be recovered only in the amount exceeding the above penalties;
contractors to claim that until they have been paid however, this can be changed by contract.
they retain title and the right to remove goods and
materials supplied from the site? However, courts may and often do reduce the amount of penalties
which they consider excessive.
Yes, the Civil Code and the Rules for the Conclusion and
Performance of Construction Contracts specifically provide for such 3 Common Issues on Construction
a right.
Contracts

2.1 Is it common for construction contracts to be
supervised on behalf of the employer by a third party? According to the Civil Code, the employer has the right to demand
Does any such third party (e.g. an engineer or architect)
amendments to the design and estimate documentation when such
have a duty to act impartially between contractor and
employer? Is that duty absolute or is it only one which amendments will not entail additional costs for the contractor. At
exists in certain situations? If so, please identify when the same time, in accordance with Article 699 of the Civil Code, the
the architect/engineer must act impartially. contractor is entitled to demand a review of the estimates in case
the cost of actual work exceeds the values provided in the estimates
Yes, it is common for the employer to appoint an engineering by 10% or more, due to reasons outside of the contractor’s control.

Any other variations must agreed by the parties as a written claims concern defects in buildings, isolated premises and parking
addendum to the original contract. Failure to do this will be treated places, the prescription period is three years. Prescription periods
as a breach of the “written form” requirement (see the response to start running from the date when the party entitled to claim has
question 1.2 for the consequences of this). learned or should have learned of the events giving cause to a claim
(violation of the respective party’s rights). Where the law and/or the
contract provides for a warranty term and the employer has notified
3.2 Can work be omitted from the contract? If it is
omitted, can the employer do it himself or get a third the contractor about defects within this term, the prescription period
Belarus
party to do it? starts from the date when this notice was made.
Yes, where the contract directly provides for this. Where the 3.7 Who normally bears the risk of unforeseen ground
contract does not provide so, an omission can only happen by way conditions?
of a written addendum to the contract.
Work omitted in accordance with the contract may be done by the The general rule is (applicable not only to unforeseen ground
employer personally or he can retain another contractor to perform conditions) that if the contractor discovers that additional work
it. not provided for in the design documentation (this would normally
include design solutions based on geodetic and geological data) is
necessary, he must immediately give notice to the employer. If the
employer does not respond with instructions within 10 days (the
contract may provide for a different time period), the contractor
must suspend work and will be entitled to a claim for costs because
Relevant provisions of the Civil Code and mandatory requirements
of the delay. The employer will not be liable for costs if he proves
of the Rules for the Conclusion and Performance of Construction
that the additional work was not necessary.
Contracts, as well as certain other statutes and regulatory
instruments, are always implied in a construction contract. Unless If the contractor does not follow the above procedure, he will not be
the parties agree otherwise, dispositive terms contained in the above entitled to a claim for costs unless he proves that immediate actions
regulations are also implied. were necessary to prevent the demise of or damage to the project.
Otherwise, prior to the employer taking over, the contractor bears
the risks of damage to or demise of the project, unless this was
3.4 If the contractor is delayed by two events, one the
fault of the contractor and one the fault or risk of caused by materials and components provided by the employer, or
his employer, is the contractor entitled to: (a) an where this resulted from incorrect instructions by the employer and
extension of time; or (b) the costs occasioned by that the contractor gave the employer notice of the respective risks.
concurrent delay?
The courts would consider such situations on a case-by-case basis. affecting the completion of the works?
They would consider such factors as: the nature of each event;
whether the two events are interconnected (did one cause the other Generally, where changes in the law make it impossible to complete
or prevent the other from ending?); whether the contractor gave the project as designed, this risk is borne by the employer, except
notice to the employer of the obstacles to due performance; and where the contract provides for both design and construction. This
whether each party took sufficient efforts to mitigate the situation. is subject to the frustration, force majeure and “material change of
circumstances” doctrines as described below.
3.5 If the contractor has allowed in his programme a Where changes in law make it impossible to complete the project
period of time (known as the float) to allow for his own altogether, the risk is borne by the employer and the contractor must
delays but the employer uses up that period by, for
be compensated for the work performed.
example, a variation, is the contractor subsequently
entitled to an extension of time if he is then delayed Where changes in law make it substantially more expensive to
after this float is used up? complete the project as designed, different situations are possible:
1. Where the contract is cost-plus or a unit price contract, the
Belarusian law does not expressly provide for the concept of a risks are borne by the employer.
programme and, as explained above, only variations which do 2. Where the contract is fixed-price, only certain risks are borne
not entail an additional cost for the contractor may be unilaterally by the employer:
initiated by the employer. Therefore, this situation is difficult a. changes in tax law; and
to envisage in the context of Belarusian law. If the contractor b. changes in certain regulatory indices and values, which
experiences delay due to delays by the employer (e.g. late delivery the contractor used to calculate its price.
of materials by the employer), the contractor may be entitled to an
extension of time.
3.9 Who usually owns the intellectual property in relation
3.6 Is there a limit in time beyond which the parties to
a construction contract may no longer bring claims
Intellectual property rights to the design and operation of the
what date does time start to run? property traditionally belong to the author of the creative work. The
contractor, engineer or designer can be the author of the construction
project as the case may be. Employers must require the contractors
Yes, there are such limits. First of all there is a standard prescription
to assign to the employers the ownership and/or financial rights
period of three years for all types of claims. For claims related to the
pertaining to the relevant intellectual property rights under the
quality of construction works, the period is one year. However, if the
special agreement or special clauses in the construction agreement.

■ the MCC arose due to reasons which the interested party

3.10 Is the contractor ever entitled to suspend works? could not overcome by acting reasonably and in good faith;
■ performance of the contract in accordance with its conditions
Yes, he is. There are three different situations when this may occur would substantially deprive the interested party of the
(all are described here in general terms, though the law sets them benefits it could otherwise reasonably anticipate as a result of
out in greater detail): performance not under the MCC; and
1. The contractor discovers that, due to omissions in the design ■ the MCC is not the interested party’s risk.
Belarus
documentation, certain additional costs may be incurred. In exceptional situations, the courts may change the contract rather
2. There are factors outside of the contractor’s control which than terminating it.
may negatively impact the result of the work.
However, the MCC rule is rarely applied by Belarusian courts and
3. The employer is not performing his duties (e.g. delivery of the application of that rule is decided on a case-by-case basis.
materials, transfer of design documentation) on which the
result of the work depends, or it is obvious that the employer
will delay such performance. 3.13 Are parties which are not parties to the contract
In each of these cases, the contractor is required to give notice to the entitled to claim the benefit of any contract right
which is made for their benefit? E.g. is the second or
employer and await his instructions.
subsequent owner of a building able to claim against
the original contracts in relation to defects in the
3.11 On what grounds can a contract be terminated? Are building?
there any grounds which automatically or usually
entitle the innocent party to terminate the contract? This is only possible if such benefit to a third party is specifically
Do those termination rights need to be set out mentioned in the contract in respect of the particular party.
expressly?
The subsequent owner can claim damages only under the contract
on the basis of which he acquired the property. For example, a
In general terms, contracts may be terminated on the following
buyer of a property under a sales contract may have a claim against
grounds:
the seller for defects in the property.
1. Material breach by one of the parties (the law describes
several situations in which material breaches can be deemed
to exist). 3.14 Can one party (P1) to a construction contract which
2. Failure by one of the parties to provide performance on which owes money to the other (P2) set off against the sums
the performance of the other party is based (called “reciprocal due to P2 the sums P2 owes to P1? Are there any
performance”). limits on the rights of set-off?
3. Termination for “good reasons” by the employer.

Yes, set-off is possible. Set-off may occur in respect of debts which
Contracts may provide for additional grounds. Those mentioned
are due or which are due when they are claimed or the maturity
above do not need to be set out in a contract in order to entitle a
of which is not defined. Set-off is not possible in respect of debts
party to termination.
for some activities (which are normally not related to construction
activity) and when the prescription period for which has expired,
3.12 Is the concept of force majeure or frustration known if P1 or P2 specifically mentioned it. Contracts may also limit
in your jurisdiction? What remedy does this give rights of set-off. Furthermore, insolvency law contains substantial
the injured party? Is it usual/possible to argue limitations to the right of set-off.
3.15 Do parties to construction contracts owe a duty of
In Belarusian law, force majeure is termed “circumstances of care to each other either in contract or under any
insurmountable force”. The law does not clearly define the meaning
of this term but provides that entities acting in an “entrepreneurial
capacity” are exempted from liability for default if the default is A duty of care is a common law doctrine which does not have
caused by such circumstances. Therefore, force majeure normally exact counterparts in the law of the Republic of Belarus. However,
provides defence to a party defaulting on the contract. according to Article 705 of the Civil Code, if for the performance
of the contract any obstacles were found, the employer and the
However, most contracts contain a “loss of interest” clause
contractor should take all reasonable actions to eliminate these
incorporated into the force majeure section, whereby any party to
obstacles. If any expenses are incurred by one of the parties for the
the contract may terminate it, where force majeure lasts for more
purpose of elimination, the obstacles should be compensated by the
than a certain prescribed time period.
other party if this is specifically mentioned in the contract.
Belarusian law also provides for a “material change of
The rules of the Civil Code on work production contracts (a more
circumstances” (“MCC”), describing it as follows: “a change of
circumstances is material, if it is such that had the parties been able general contract category to which construction contracts belong),
to reasonably foresee it, they would not have entered into a contract also provide that the work result must be fit for its purpose defined in
or would have entered into it on significantly different conditions”. the contract, or if no such purpose is defined, for purposes for which
such a work result would normally be used.
Where the parties are unable to renegotiate the contract in light of
the MCC, any one of them may apply to the court with a claim to Furthermore, the contractor is liable to the employer for any
have the contract terminated or changed. Termination is allowed detriment caused to the property of the latter, which was provided to
by the court if: the contractor for the performance of the contract.
■ at the time of entering into the contract, the parties had relied There is also some regulation for compensation of damages which
on the assumption that the MCC in question would not occur; should be mentioned.

Contractors and employers are liable to each other for any damage other contractual matters, parties have a choice of arbitration or state
caused not just by breach of obligations, but also under the civil economic courts.
delict doctrine. Most construction contracts have amicable resolution clauses,
Construction sites and equipment are considered hazardous objects. whereby attempts at resolution by negotiations is required prior to
Under Belarusian law, before the employer takes over the project, the filing a law suit.
contractor is, subject to certain exceptions, considered to be in control Furthermore, the Code of Commercial Procedure requires that, prior
of the site and therefore by default liable to all other persons on the to filing a suit, the aggrieved party must send a claim (“pretenziya”)
Belarus
site for damage incurred by them or damage caused to their property. to the other party, setting forth the merits of the claim, enclosing
The Civil Code also contains provisions against “abuse of rights”, evidence, citing relevant legal authorities to support the claim and,
i.e. exercise of rights, which is prejudicial to others. In construction where the claim is for damages or penalties, providing a calculation
contracts, this will apply to almost any interaction between the of the respective amount.
parties, but it is hard to envisage how a Belarusian court would Unless the contract provides for a shorter term, court proceedings
award damages based on an abuse of rights by any party to a may be commenced only upon the expiration of 30 days after the
construction contract. The court would rather refuse to enforce a other party has received the claim. Importantly, the law suit may not
right which is exercised in an abusive manner. go beyond the substance of the claim.
3.16 Where the terms of a construction contract are 4.2 Do you have adjudication processes in your
ambiguous, are there rules which will settle how that jurisdiction? If so, please describe the general
ambiguity is interpreted? procedures.
The initial position is that contracts are interpreted in keeping No, there is no equivalent to adjudication in Belarus.
with the literal meaning of words and phrases used in them. If the
content of the contract cannot be thus determined, the courts must
determine the “true will of the parties, taking into consideration 4.3 Do your construction contracts commonly have
arbitration clauses? If so, please explain how
the goal of the contract”. For this, the courts will consider “all
arbitration works in your jurisdiction.
relevant circumstances”, including preparatory documentation for
the contract, negotiation material, regular practice of the parties and
Usually, construction contracts for a high total contract value contain
their subsequent behaviour.
arbitration clauses. Arbitration in Belarus is primarily regulated by
the Law of the Republic of Belarus “On international commercial
3.17 Are there any terms in a construction contract which arbitration” (hereinafter – “ICA Act”), dated 9 July 1999, the Law of
are unenforceable? the Republic of Belarus “On arbitration courts” dated 18 July 2011
and the Civil and Economic Procedural Codes of the Republic of
Whenever a construction contract purports to deprive or limit Belarus (hereinafter – “CPC” and “EPC”). The ICA Act is based on
a right which is provided in the law without the wording “unless the UNCITRAL Model Law on international commercial arbitration
otherwise provided in a contract” or vice versa, i.e. it attempts to 1985 in its primary form, without the changes and amendments
state otherwise an imperative provision of the law, these terms will adopted in 2006.
be unenforceable. One notable example is that the law provides for a
In order to initiate arbitration, a party should submit the request
minimum threshold of penalties on both parties: on the contractor for
for arbitration to the arbitral institution based on the arbitration
late delivery; and on the employer for late payment. It is impossible
clause. Further process is regulated by the relevant rules of the
to set lower penalties in the contract. Another notable example
arbitration institute. The main arbitration institute in Belarus is
discussed above are “pay when paid” clauses. However, this is not
the international arbitration court at the Belarusian chamber for
limited to the examples provided.
commerce and industry; however, several specialised construction
arbitration courts also exist.
3.18 Where the construction contract involves an element
of design and/or the contract is one for design only,
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 arbitration, do your jurisdiction’s courts recognise
the designer have to give an absolute guarantee in and enforce international arbitration awards? Please
respect of his work? advise of any obstacles to enforcement.
In the absence of any contractual provisions which impose According to Article 245 of the EPC, foreign arbitral awards are
additional duties, a designer’s liability is limited to correspondence recognised and enforced by the national courts if such recognition
of the design to the assignment of the client, the client’s needs of and enforcement is stipulated by legislation or by an international
which the designer is aware and the compliance of the design with treaty, or on the basis of the reciprocity principle.
the applicable regulations. Belarus ratified the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards on 13 September 1960, and
it came into force on 13 February 1961.
4 Dispute Resolution
According to Article 45 of the ICA Act, international arbitration
awards (regardless of the country in which they were made) shall be
4.1 How are disputes generally resolved? recognised and enforced in accordance with the economic procedural
legislation of the Republic of Belarus and its international treaties.
Where disputes are concerned with rights to real estate, Belarusian The procedure of recognition and enforcement of Foreign Arbitral
state economic courts have exclusive jurisdiction. However, for Awards is set forth in Chapter 28 of the EPC and Annex 4 of the CPC.

Under the procedural law of Belarus, grounds for refusal in the A judgment enters into force after the expiration of 15 days from the
recognition and enforcement of foreign arbitral awards are similar date of its adoption, unless appealed. On the basis of the judgment
to those specified in Article 5 of the New York Convention. after its entry into force, the court issues a writ to the claimant,
except in the case of immediate execution, when the writ is issued
immediately after the decision.
4.5 Where the contract provides for court proceedings
in a foreign country, will the judgment of that foreign A first instance judgment can also be appealed to the appellate court
court be upheld and enforced in your jurisdiction? within 15 days from the date of the judgment of the first instance
Belarus
court, and considered within 15 days.

Unless regarding an international agreement whereby Belarus The judgment of the appellate court may be appealed to the court
recognises and agrees to enforce the judgment of foreign courts, of cassation within one month from the date of the judgment of the
a Belarusian court will, generally, recognise and enforce a foreign appellate court, and considered within one month.
judgment on the basis of reciprocity. The general position is that
The decision of the court of cassation may be subject to review via a
reciprocity is presumed by the court unless a party to a dispute shows
supervision procedure within a period not exceeding one year from
otherwise. A Belarusian court is entitled to refuse enforcement of
the date when the cassation judgment entered into force.
a foreign for a number of reasons, most of them, procedural. One
notable exception is the “public policy” doctrine. It should be noted
that, in Belarus, this doctrine is not yet very clear.
4.6 Where a contract provides for court proceedings in

your jurisdiction, please outline the process adopted,
a decision by the court of first jurisdiction; and (b) a
decision by the final court of appeal.
Construction cases are considered by the economic court of first

instance within a period of not more than two months from the date
of the court’s judgment on the appointment of the case for trial. In
exceptional cases, taking into account the particular complexity
of the case, the term of the proceedings may be extended to four
months, and cases involving foreign persons outside the Republic of
Belarus by up to one year.

Ivan Martynov Vitaly Tvardovskiy

SBH Law Office SBH Law Office
Krasnoarmeiskaya 20A/1, offices 26–27 Krasnoarmeiskaya 20A/1, offices 26–27
Minsk 220030 Minsk 220030
Belarus Belarus
Tel: +375 17 327 53 77 Tel: +375 17 327 53 77
Belarus
Email: ivan.martynov@sbh-partners.com Email: vitaly.tvardovskiy@sbh-partners.com
URL: www.sbh-partners.com URL: www.sbh-partners.com
Ivan Martynov received his law degree in 2003 from the European Vitaly Tvardovskiy is an Associate at SBH Law Office. He has been
Humanities University in Minsk. He also has a GDL from Nottingham a practising lawyer since 2014. Vitaly specialises in real estate
Law School. Prior to joining SBH, Ivan was a founding partner of a and construction, foreign investment, contract, corporate, labour
construction and inbound investment law firm, which merged with SBH and migration law. Recently, he has participated in many projects
in 2016. He has been practising law for over 13 years. related to obtaining all the necessary permissions for construction
activity in Belarus for foreign companies, involving the attraction of
Currently, he is a Partner in the Construction and Investments Practice
investments into the country amounting to more than USD 1 billion.
at SBH Law Office. Ivan specialises in construction and inbound
He also provides legal support for the establishment, restructuring and
investment law, real estate law as well as tax. Ivan is a native speaker
liquidation of legal entities and representative offices for both residents
of Belarusian and Russian, is fluent in English and Lithuanian and a
and non-residents of the Republic of Belarus.
confident French speaker.
Ivan is a member of a working group for the reform of construction and
inbound investment law organised by the Ministry of Architecture and
Construction.
SBH Law Office is a full-service law firm with offices in Belarus and Ukraine. We advise our clients in all areas of business, corporate and financial
law, with an emphasis on mergers and acquisitions, inbound foreign investment, insurance, banking, arbitration and litigation, real estate and
construction.
For over 25 years, since the emergence of the new Eastern European independent states, our lawyers and attorneys have been providing foreign and
Belarusian companies and entrepreneurs, as well as sovereign states, with detailed and ground-breaking advice, working on cases and transactions
which have shaped Belarusian law and business practice. We also provide transnational legal services through our strategic alliance with leading
firms in the Baltic region and our office in Ukraine.
We are also well-known for our pro bono work with government bodies, charities, cultural and sports institutions.

Chapter 6
Brazil Thiago Moreira
Mattos Filho, Veiga Filho, Marrey Jr

e Quiroga Advogados Eduardo Damião Gonçalves
is completed, the project is submitted to a bidding process involving

1 Making Construction Projects
several contractors. The selected contractor will be in charge to
detail the basic design provided by the employer and, once it is
1.1 What are the standard types of construction contract approved by the employer (or by the employer’s technical advisor/
in your jurisdiction? Do you have contracts which engineer), the selected contractor shall perform the construction
place both design and construction obligations services in accordance with such detailed design.
upon contractors? If so, please describe the types of
Alliance Agreement
only contract common in your jurisdiction. Do you This is a co-operative method of contracting which still represents a
have any arrangement known as management very small portion of the projects developed in Brazil, by means of
contracting, with one main managing contractor which the parties work together and align their commercial interests
and with the construction work done by a series in order to share the risks and rewards resulting from the contract. It
of package contractors? (NB For ease of reference
is also common to establish in the contract the goals to be achieved
by the parties in exchange for bonuses and with penalties for
engineering contracts.) underachievement.
Most of the projects developed in Brazil use tailor-made contracts 1.2 Are there either any legally essential qualities needed
(i.e. contracts specifically drafted for a particular project) rather than to create a legally binding contract (e.g. in common
standard forms. Notwithstanding that, it is becoming more usual to law jurisdictions, offer, acceptance, consideration
and intention to create legal relations), or any
use contracts based on international standard forms such as FIDIC
specific requirements which need to be included in a
(Fédération Internationale des Ingénieurs-Conseils) and NEC (New construction contract (e.g. provision for adjudication or
Engineering Contract) whenever a foreign player is involved (e.g. a any need for the contract to be evidenced in writing)?
sponsor, partner or lender). Such projects, however, still represent a
very small percentage of the projects developed in Brazil. In order to create a legally binding contract under Brazilian law:
The most common contractual structures used in Brazil are the (i) the contracting parties shall have full capacity and authority to
following: contract; (ii) the object of the contract shall be lawful, possible,
Engineering, Procurement and Construction (EPC) determined or determinable; and (iii) the formalities required by law,
if any, must be observed. Even though there is no requirement for
An EPC contract provides for a single point of responsibility. The
the contract to be evidenced in writing, it is highly recommendable
employer hires a contractor to provide the design, all necessary
to do so as well as to provide for balanced consideration.
materials and equipment and the construction services for the
project. In large projects involving construction and erection works,
as well as equipment supply (such as power plants and factories), 1.3 In your jurisdiction please identify whether there is
the contractor can be hired to provide its services on a turn-key a concept of what is known as a “letter of intent”, in
basis, in which case it becomes responsible for taking over the which an employer can give either a legally binding or
project in order to allow the employer to be ready to operate it upon enter into a contract later or to commit itself to meet
completion of the works by the contractor. certain costs to be incurred by the contractor whether
Engineering, Procurement and Construction Management or not a full contract is ever concluded.
(EPCM)
This type of contract reflects the arrangement known as management Letters of intent are commonly used in construction projects in
contracting, in which the contractor acting as an agent of the Brazil. Such instruments can be binding or non-binding, depending
employer enters into separate contracts with different contractors on the type of works, project deadlines, risks involved, etc. In most
who provide the materials, equipment and construction services cases, the purpose of the letter of intent is to make possible the
necessary for the project. commencement of certain activities related to the works and even
the mobilisation of some contractors’ resources before the detailed
Design-Bid-Build (DBB)
design is totally concluded and/or approved by the parties. An
In this type of procurement, the employer contracts a designer to incomplete binding letter of intent may face enforceability issues
provide the basic design of the project and, once such basic design in Brazilian courts.

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados Brazil
1.4 Are there any statutory or standard types of insurance 1.5 Are there any statutory requirements in relation
which it would be commonplace or compulsory to to construction contracts in terms of: (a) general
have in place when carrying out construction work? requirements; (b) labour (i.e. the legal status of those
For example, is there employer’s liability insurance working on site as employees or as self-employed
for contractors in respect of death and personal sub-contractors); (c) tax (payment of income tax of
injury, or is there a requirement for the contractor to employees); or (d) health and safety?
Brazil
(a) General Requirements
Brazilian rules contemplate mandatory insurance and the most
Engineers and agronomist engineers must be registered before
important are those described in Article 20 of Decree-Law No. 73/66
the Regional Council of Engineering and Agronomy (CREA)
(regulated by Decree No. 61,867/67), namely: (i) bodily injury and
and architectures and urban planners must be registered before
physical damage to passengers in commercial flights; (ii) civil
the Council of Architecture and Urbanism (CAU). Any services
liability for aircraft owners and for air carriers; (iii) civil liability for
related to such professionals can only be performed by individuals
real estate contractors of urban zone constructions with respect to
duly registered with CREA or CAU. Without these registries,
bodily injury and physical damage injuries and property damages;
professionals may suffer sanctions, both of a civil and criminal
(iv) assets encumbered as guarantees of loans or financings granted
nature, which may affect the regular development of the project.
by public financing institutions; (v) guarantee of compliance
with the obligations of the real estate developer and constructor; Further to that, in construction projects the standards and regulations
(vi) guarantee of payment incumbent upon the borrower related issued by the Brazilian Standards Association (ABNT) shall be
to construction, including real estate obligations; (vii) buildings observed. Specific standards applicable to certain industries are also
divided into autonomous units; (viii) fire and transportation of common practice.
goods pertaining to entities located in or transported throughout (b) Labour
Brazil; (ix) export credit, whenever deemed convenient by the In Brazil, employees’ basic labour rights are set forth in the Federal
National Counsel of Private Insurance – CNSP; (x) bodily injury Constitution, which also establishes the minimum conditions that
and physical damage caused by roadway automotive vehicles and must be complied with in employment relationships. The labour
vessels, or by their cargo, to individuals regardless of whether they
rights and minimum conditions are also treated in federal laws and
are being transported or not; and (xi) civil liability of land, maritime,
most of them are restated in the Consolidation of Labour Laws
river and lake transporters for damages caused to the cargo.
(CLT). There are also mandatory regulations, established by means
In addition to the mandatory insurances set forth by Article 20 of of collective bargaining agreements executed between one or more
Decree-Law No. 73/66, there are specific laws for the construction employers’ unions representing the companies, and one or more
market that also refer to certain aforementioned insurance coverage, trade unions representing employees. The relationship between
such as: (i) Article 13 of Law No. 4,591/64, which establishes that the contracting party and contractor, however, is governed by the
all units of residential buildings shall be insured against fire and Brazilian Civil Code.
other casualties that may cause full or partial destruction of the
Hiring service providers through an intermediary company is
building; (ii) Articles 1 and 2 of Law No. 4,864/65, which establish
possible. Recently, changes in the law regarding outsourcing (Law
that the buyer of a financed real estate building with a maximum
No. 6,019/1974) were enacted by the Brazilian Congress, in order
value corresponding to three hundred (300) times the minimum
to reduce the unemployment rates and labour disputes related
wage in Brazil must purchase life insurance (“seguro de vida de
renda temporária”); and (iii) Paragraph 1 of Section II of Article 56 to outsourcing. After the changes that took place, outsourcing is
of Law No. 8,666/93, which determines the obligation to purchase allowed in any activity of the companies, including core-business.
a performance bond for public services and constructions whenever (c) Tax
the same is requested in the invitation to bid. (c.1) Employees
Notwithstanding the above-mentioned mandatory insurance In general terms, salaries paid to employees of Brazilian companies
coverage directly and indirectly related to the construction market, are subject to withholding of Social Security Tax at the maximum
contractors and related service providers usually purchase the rate of eleven per cent (11%) up to a maximum of six hundred and
following coverage, which may be part of one or more insurance eight Reais and forty-four cents (R$ 608.44), and to withholding
policies: of Income Tax (WTH) at progressive rates ranging from zero per
(a) engineering risks; cent (0%) up to twenty-seven-and-a-half per cent (27.5%), as per the
(b) property; table below (applicable as from April 2015):
(c) third parties’ civil liability; Monthly Tax Basis (R$) Tax Rate (%) Portion to be Deducted (R$)
(d) automobile liability; Up to 1,903.98 - -
(e) employer’s civil liability; From 1,903.99 to
7.5 142.80
2,826.65
(f) bodily injury and physical damage and life coverage for From 2,826.66 to
constructors’ employees; 15.0 354.80
3,751.05
(g) coverage for the transportation of equipment to be used in the From 3,751.06 to
22.5 636.13
construction works; 4,664.68
(h) performance bond; and Over 4,664.68 27.5 869.36
(i) environmental risks. In addition to the above, Brazilian companies are subject to Social
Despite there being no market practice, we advise companies to Security Tax at an approximate global rate of twenty-eight per cent
seek the assistance of an insurance broker who is able to assess all (28%) on payroll. The legal taxpayer of such taxes is the employer,
risks inherent to a given project and determine the most suitable differently from the ones mentioned above, in which case the
coverage for each type of project. employer is only responsible for the withholding.

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

to the sub-contractor shall only occur upon receipt by the contractor

1.8 Is it possible and/or usual for contractors to have of the payments made by the final client (i.e. the employer).
retention of title rights in relation to goods and
supplies used in the works? Is it permissible for Although the inclusion of this clause is not uncommon, such
contractors to claim that until they have been paid provision may be challenged as being abusive if the sub-contractor
they retain title and the right to remove goods and has fully and duly performed its contractual obligations – i.e. has
materials supplied from the site? supplied the goods and services contracted – without receiving the
related payments.
Brazil
The Brazilian Civil Code does provide for the possibility of sales The inclusion of a “pay when paid” clause is not possible in
with retention of title. However, retention of title legal provisions contracts entered into with public/governmental entities (Public
are only applicable to goods which are capable of being identified Contracts). However, a private contractor may include a “pay when
and differentiated of its peers (e.g. equipment which can be identified paid” provision in the sub-contracts related to a Public Contract as
through serial number, vehicles). long as the relevant Public Contract allows a sub-contracting part
In this sense, materials and goods supplied in the works are normally of the works.
not comprised in the scope of application of the Brazilian Civil
Code with regards to retention of title. Notwithstanding, scholars, 2.3 Are the parties permitted to agree in advance a fixed
as well as parts of relevant case law, understand that the contractor sum (known as liquidated damages) which will be
may retain the title in relation to goods and supplies used, as well paid by the contractor to the employer in the event of
as the right to remove any goods and materials supplied from the particular breaches, e.g. liquidated damages for late
completion? If such arrangements are permitted, are
site, provided that: (i) the contractor has a credit right against the
there any restrictions on what can be agreed? E.g.
employer; (ii) there is a link between the credit and the goods/ does the sum to be paid have to be a genuine pre-
materials retained; (iii) the retention or the possession of the goods/ estimate of loss, or can the contractor be bound to
materials is lawful; and (iv) the parties did not agree otherwise in pay a sum which is wholly unrelated to the amount of
the contract. Such situation may be altered in case the employer financial loss suffered?
is subject to a judicial recovery procedure (recuperação judicial).
Brazilian law allows the parties to agree in advance on a penalty
amount to be paid by the defaulting party in the event of a breach
2 Supervising Construction Contracts of the contract. Unlike common law, the Brazilian legal system
accepts contractual penalty clauses, which may be due for delay/
breach (penalty for delay) in performing a specific obligation or as
supervised on behalf of the employer by a third party? compensation (compensation penalty) in case the entirety of the
Does any such third party (e.g. an engineer or architect) contract is breached.
have a duty to act impartially between contractor and The amount of the penalty clause does not necessarily need to
employer? Is that duty absolute or is it only one which represent a genuine pre-estimate of loss; however, in any case, it
exists in certain situations? If so, please identify when
must be limited to the value of the breached obligation and may
the architect/engineer must act impartially.
even be lowered in court should it be deemed patently excessive
vis-à-vis the committed breach or if the main obligation has been
In Brazil, it is common that, under construction contracts, the partially performed.
employer hires a third party to supervise the progress of works on
Both the penalty for delay and the compensation penalty may have
his behalf. However, in Brazil, such third party does not have a duty
a similar function to liquidated damages (pre-determined damages),
to act impartially between contractor and employer. If the parties
whereby the creditor may collect the penalties irrespectively of
intend to have a third party to act impartially between the contractor
having incurred actual damages and the parties may agree that no
and the employer, the parties should hire an independent engineer
further damages will be due in this case. The parties may, however,
or architect, or even an expert, as the case may be, to execute this
agree that the contractual penalty does not prevent the claiming of
specific task. An example of this is dispute boards, which emerged
additional indemnification for damages arising out of the breach.
in the United States in the 1960s, and which are gaining more
In such case, the amount of damages specified in the contract is
importance in Brazilian construction contracts. A dispute board is
deemed to be the minimum amount of indemnification due. If the
a committee composed by experienced and impartial professionals damages exceed this minimum amount, it is possible to recover
(in most cases, they are engineers), hired before the commencement additional indemnification from the breaching party. In addition
of the construction project to monitor the progress of the works, to this, according to the Brazilian Civil Code, the party to which
encouraging the parties to avoid disputes and assist them in solving the penalties for delay are owed also has the right to require the
those that cannot be avoided. The advantage of the dispute boards performance of the delayed obligation.
is that they can be appointed at the commencement of the project,
taking responsibility to conduct regular visits to the site and to
be directly involved in the works from the beginning, making 3 Common Issues on Construction
recommendations and influencing the behaviour of the parties. Contracts
2.2 Are employers entitled to provide in the contract that 3.1 Is the employer entitled to vary the works to be done
they will pay the contractor when they, the employer, under the contract? Is there any limit on that right?
have themselves been paid; i.e. can the employer
paid” clause? In private contracts, variations on the works usually may be ordered
by the employer at any time prior to taking over the works.
The “pay when paid” clause is commonly found in sub-contracts, and Generally, construction contracts include “change order provisions”
purports to indicate that the payments to be made by the contractor whereby the parties shall discuss the impact of the respective

variation and, in case of material changes, negotiate a price

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

conditions?
In the absence of a specific contractual obligation to the contrary,

The allocation of the risk of unforeseen ground conditions will
all applicable legal provisions which are not expressly stated in the
depend on the type of construction contract. Usually, in EPC lump-
contract shall apply to the contract (e.g. five-year guarantee, time-
sum contracts the rule is that such risk lies with the contractor.
bar, force majeure, limitation of liability with respect to indirect
However, under Brazilian law, the risk is shifted to the employer
damages and termination). The parties may expressly waive the
when such unforeseen ground conditions are an extraordinary
application of certain legal provisions as long as they are not
supervening event that places an excessively onerous obligation on
considered mandatory or to be of public policy.
the contractor.

The purposes of such legal provision are clearly to: (i) prevent the
unjust enrichment of the employer since he is the beneficiary of the 3.12 Is the concept of force majeure or frustration known
works; and (ii) indicate that the employer, as the final beneficiary in your jurisdiction? What remedy does this give
the injured party? Is it usual/possible to argue
of the work, shall bear bad ground conditions whenever such successfully that a contract which has become
conditions are unforeseeable and make the performance of the uneconomic is grounds for a claim for force majeure?
works excessively onerous to the contractor.
Although Brazilian law provides that in such extraordinary cases The concept of force majeure is known and enforceable in Brazil.
Brazil
the risk of unforeseen ground conditions lies with the employer, the According to the Brazilian Civil Code, force majeure shall be
parties can alter it contractually. considered as “the necessary event, whose effects were impossible
to avoid or impair”. The affected party shall not be responsible
3.8 Who usually bears the risk of a change in law for losses resulting from force majeure events, unless such
affecting the completion of the works? responsibility was expressly stated in the contract.
Thus, under Brazilian law, force majeure is a legal exemption of
The employer normally bears the risk of a change in law, mainly performance and liability during its occurrence. Therefore, under a
with respect to a tax burden and technical matters except if provided contractual relationship, the party affected by a force majeure event
otherwise in the contract. shall not be held liable for damages arising from it, provided that: (i)
such party submits enough evidence of the event; and (ii) such event
was unforeseeable and beyond the party’s control.
to the design and operation of the property? Although, in principle, each party shall bear their respective expenses
and costs resulting from a force majeure event, it is common in EPC
Generally, the contract establishes which party owns the intellectual contracts to allocate the force majeure risks to the employer.
property rights in relation to the design and operation of the The parties may agree upon a contractual definition of force majeure
property. In most cases, the designer or the contractor, as the case and even waive the application to the contract of the concept of force
may be, grants to the employer a perpetual licence for the use of majeure established in the Brazilian Civil Code. It is common to
the intellectual property related to the design or operation of the expressly exclude from the concept of force majeure events such as:
property. (i) changes affecting the economic balance of the contract, even if
the contract becomes uneconomic; (ii) labour or materials shortage;
and (iii) strikes restricted to the contractor’s employees.
3.10 Is the contractor ever entitled to suspend works?
In the absence of contractual provisions to the contrary, the 3.13 Are parties which are not parties to the contract
contractor may suspend the works without paying an indemnity to entitled to claim the benefit of any contract right
the employer due to: (i) employer’s fault (such as delay in obtaining
the applicable licences or authorisations); (ii) occurrence of force the original contracts in relation to defects in the
majeure events; (iii) changes resulting from unforeseeable events building?
(such as geological, hydraulic or similar events), which affect the
economic balance of the contract resulting in excessively onerous
According to the Brazilian Civil Code, a party that is not a party
obligations on the contractor; and (iv) disproportional change
to a contract is entitled to claim the benefit of any right under said
orders requested by the employer with respect to the project already
contract as long as the contract was executed for its benefit.
approved, even if the employer agrees to pay the additional costs.
Brazilian law provides for a five-year guarantee with respect to the
soundness and safety of the project. Therefore, a subsequent owner
3.11 On what grounds can a contract be terminated? Are of a building may bring a claim against the contractor in case of any
there any grounds which automatically or usually defect in the building during this period of time.
entitle the innocent party to terminate the contract?
expressly? 3.14 Can one party (P1) to a construction contract which
owes money to the other (P2) set off against the sums
In case the contract does not provide for the cases in which it could due to P2 the sums P2 owes to P1? Are there any
be terminated by the parties, Brazilian law provides that it may be
terminated in the following events: (i) fundamental breach; and/
or (ii) occurrence of an extraordinary supervening event, which The set-off of credits is permitted by the Brazilian Civil Code,
was unforeseeable to the parties and results in excessively onerous provided that debts have the same legal nature, are clear and
obligations on the party claiming the termination. In such cases, defined, overdue and of fungible goods. Therefore, in this particular
the claimant must request the termination from the relevant court or example, it is most likely to be possible.
arbitral tribunal, as the case may be.
The parties are allowed to provide in the contract the termination 3.15 Do parties to construction contracts owe a duty of
events that shall apply, and even the termination at the convenience care to each other either in contract or under any
of either or both of them. The most common termination events other legal doctrine?
are: (i) bankruptcy or insolvency; (ii) breach not remedied within a
specified period; (iii) delays in the works attributable to contractor; The concept of duty of care is not applicable under Brazilian law.
and (iv) force majeure events continuing for a determined period of The parties are liable to each other in accordance with the terms of
time agreed in the contract. the contract and the provisions of the applicable law.

first law allowing and regulating the use of dispute review and
3.16 Where the terms of a construction contract are adjudication boards in public procurement contracts executed by
ambiguous, are there rules which will settle how that the Municipality.
ambiguity is interpreted?
Ambiguity is settled by general rules of interpretation of the law, 4.3 Do your construction contracts commonly have
which are provided by the Brazilian Civil Code, such as: (i) all
contracts must be interpreted in accordance with good faith and
Brazil
customary rules of the place of execution; and (ii) declarations must

Yes, construction contracts normally provide for an arbitration
be interpreted in the real sense of the intention of the parties rather
clause.
than by the literal wording of the documents.
In sum, Brazilian arbitration is regulated by federal law (Law No.
9,307/96, as amended by Law No. 13,129/15, which is based on
the UNCITRAL Model Law and the 1958 New York Convention
are unenforceable?
on the Recognition and Enforcement of Foreign Arbitral Awards
(New York Convention)). Therefore, some important principles and
Contractual provisions contrary to public policy or mandatory law features may be applied, such as due process, the right to be heard,
will be unenforceable. However, such assessment can only be done impartiality and independence of arbitrators, kompetenz-kompetenz
on a case-by-case basis. and separability of the arbitration agreement, among many others.
Any party that can enter into a contract is permitted to submit
3.18 Where the construction contract involves an element disputes to arbitration. However, the dispute must relate to rights
of design and/or the contract is one for design only, and assets that can be freely transferred by the parties.
limits on the extent of his liability? In particular, does Domestic awards – those rendered inside Brazilian territory – are
the designer have to give an absolute guarantee in considered as final judgments and do not require any confirmation by
respect of his work? courts for the purposes of enforcement. Foreign awards, on the other
hand, are subject to recognition proceedings within the Superior
The designer can be contracted to provide design services either (i) Court of Justice (STJ), in accordance with the New York Convention.
without any interference in the performance of the works, or (ii) Parties are allowed to choose an arbitral institution to administer the
with the additional incumbency to supervise the works and give case, the language, the law applicable to the dispute and the number
directions to the contractor. of arbitrators to constitute the tribunal, as well as other procedural
In the first case, the responsibility of the designer is limited to the aspects related to the arbitration.
soundness and safety of the works related to the project for a five-
year period counted from the issuance of the taking-over certificate 4.4 Where the contract provides for international
for the works. With respect to the second case, in addition to the arbitration, do your jurisdiction’s courts recognise
above, the designer is also responsible for the damages caused to and enforce international arbitration awards? Please
the employer for any omission related to the supervision of the advise of any obstacles to enforcement.
performance of the works.
Please also note that, under Brazilian law, the employer is There is no legal concept that determines what international
not allowed to modify the design without the approval of the arbitration means. Foreign arbitral awards (understood as those
designer, except if the change is not relevant or if it is required rendered outside Brazil) do require recognition in order to be
due to supervening events or technical reasons making the project enforced in Brazil. However, it is fair to say that Brazilian courts
inconvenient or excessively onerous. In the case that the design is tend to be friendly in the enforcement of arbitral awards.
changed without the designer’s approval, the designer will not be The Superior Court of Justice has exclusive jurisdiction to recognise
liable for any damages resulting from such change. foreign arbitral awards, which must be made through a recognition
proceeding subject to STJ’s Internal Rules, and in accordance with
some requirements, such as authentication by a Brazilian consulate
4 Dispute Resolution and a sworn Portuguese translation.
The defendant can object. The grounds for opposing enforcement
4.1 How are disputes generally resolved? of a foreign arbitral award are, however, limited to those provided
for in the New York Convention, the Brazilian Arbitration Law and
STJ’s Internal Rules, which are the following: (i) incapacity of the
If no amicable settlement is reached, disputes are usually resolved by
parties; (ii) invalidity of the arbitration agreement according to the
arbitration. If no arbitration clause is provided for in the contracts,
law chosen by the parties or, failing any indication thereto, the law
the disputes are resolved through court litigation.
of the place of the arbitration; (iii) absence of proper notice and
other impediments to presenting a proper defence; (iv) the award
4.2 Do you have adjudication processes in your is rendered outside the scope of the arbitration agreement; (v) the
jurisdiction? If so, please describe the general arbitration proceedings were conducted contrary to the arbitration
procedures. agreement; (vi) the award is not yet binding, or it was annulled or
suspended by the courts of the country of the seat of the arbitration;
Brazilian law does not provide for statutory adjudication as in the or (vii) the award is not contrary to Brazilian public policy, human
UK. However, the inclusion of dispute boards in construction dignity or sovereignty. The parties may only start the enforcement
contracts has become more usual in the past few years, which in proceedings in the courts where the defendant is located after the
practice creates a contractual adjudication mechanism for certain award is recognised. Once recognition is granted, the creditor may
projects. Recently, the Municipality of São Paulo passed the file for enforcement before a federal court.

losses and damages caused to the plaintiff; and (b) enforcement

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

Thiago Moreira Eduardo Damião Gonçalves

Mattos Filho, Veiga Filho, Marrey Jr Mattos Filho, Veiga Filho, Marrey Jr
e Quiroga Advogados e Quiroga Advogados
Praia do Flamengo, 200 Alameda Joaquim Eugênio de Lima, 477
Rio de Janeiro – RJ, 22210-901 São Paulo – SP, 01403-001
Brazil Brazil
Tel: +55 21 3231 8115 Tel: +55 11 3147 7608

Brazil
Email: thiago.moreira@mattosfilho.com.br Fax: +55 11 3147 7770

URL: www.mattosfilho.com.br Email: goncalves@mattosfilho.com.br
URL: www.mattosfilho.com.br
Thiago Moreira concentrates his practice on construction contracts Eduardo Damião Gonçalves has experience as both a counsel and
(onshore and offshore), equipment supply contracts, contracts typical arbitrator in a wide variety of domestic and international arbitrations,
to the oil and gas industry (e.g. charter agreements, O&M agreements, having been involved in disputes administered under the International
FPSOs, DPUs and platform construction contracts, and gas supply Chamber of Commerce (ICC), the United Nations Commission on
contracts), take or pay contracts, contracts related to the hotel International Trade Law (UNCITRAL) and Brazilian domestic rules.
industry (e.g. construction of hotels, built to suit, hotel management His practice involves complex arbitration disputes in a wide variety
agreements and franchising), as well as project development and of industries, such as construction, insurance, information technology,
infrastructure-related transactions. His experience includes advice to telecommunications, energy, and oil and gas, among others. Mr.
owners and contractors on the preparation, negotiation, pre-litigation Gonçalves was also Chairman of the Brazilian Arbitration Committee
and arbitration involving complex contracts, including construction and (CBar) and currently serves as a Vice-Chair of the Americas Initiative of
supply contracts. He has substantial experience in sectors such as the Institute for Transnational Arbitration (ITA), and is a member of the
energy, ports, airports, subways, railways, shipbuilding, oil and gas ICC Latin American arbitration group, the ICC Arbitration Commission
and hotel construction/management. Prior to joining Mattos Filho, and the Board of the Federation of International Arbitration Advocacy
Mr. Moreira worked for the Inter-American Investment Corporation (FIAA). Mr. Gonçalves has also been a frequent Lecturer in Law at the
(IDB Group) in Washington, D.C. He is a member of the Society of Fundação Getulio Vargas (FGV) and other universities in São Paulo
Construction Law in London and is currently the Co-Vice Chair of the and was a visiting scholar at Boston University School of Law. He was
Project Execution Subcommittee of the International Construction also named among the top 45 arbitration experts under the age of 45
Projects Committee of the International Bar Association – IBA. by Global Arbitration Review (GAR) in 2011.
Mattos Filho is structured to provide services to clients in different legal areas in a coordinated and integrated manner, working in multidisciplinary
teams whenever necessary. This work dynamic allows the firm to deliver tailor-made solutions to their clients, thereby enhancing the understanding
of their business and making them a valuable partner. Mattos Filho is a leader in more than 30 different practice areas and works continuously to
ensure that all these practices are benchmarks for the market. Creation of industry groups and market niches, combined with their comprehensive
knowledge of the market and their clients’ business needs, are examples of their efforts to keep them at the forefront in providing legal services.
They represent domestic and foreign companies, financial institutions, investors, multilateral agencies, investment funds, pension funds, insurers
and reinsurers and non-profit organisations.

Chapter 7
Canada William J. Kenny
Miller Thomson LLP Leanna Olson
The Royal Architectural Institute of Canada and the Association

of Consulting Engineers of Canada have developed standard form
contracts for situations where an owner retains an architect or
1.1 What are the standard types of construction contract engineer for design only.
in your jurisdiction? Do you have contracts which
place both design and construction obligations
1.2 Are there either any legally essential qualities needed
contracting, with one main managing contractor
construction contract (e.g. provision for adjudication or
and with the construction work done by a series
any need for the contract to be evidenced in writing)?
contracts” as an abbreviation for construction and Most provinces in Canada require the elements of offer, acceptance
engineering contracts.) and consideration as well as capacity of the parties to enter into
contractual arrangements. Contracts need not be in writing, though
There are a variety of project delivery methods and construction most construction contracts are and should be.
contracts in Canada. In Design Bid Build contracts, the owner Agreements that involve a sale of land must be in writing to comply
contracts with an architect/engineer for design work before with the Statute of Frauds. In addition, a contract may be found
contracting with a general contractor for construction. Design Build invalid or void for uncertainty if it lacks one of the following three
contracts involve the owner contracting with one party to design and basic components: parties; price; and product.
build the project. In Construction Management contracts, the owner
The province of Québec is governed by civil law. The Civil Code of
retains a construction manager to work with a design team and
Québec provides that “[a] contract is formed by the sole exchange
either helps the owner retain subcontractors or retains them directly.
of consents between persons having capacity to contract, unless,
Engineering Procurement and Construction contracts are used
in addition, the law requires a particular form to be respected
for large projects and involve the owner contracting with a single
as a necessary condition of its formation, or unless the parties
party to deliver the entire project. In Engineering Procurement and
subject the formation of the contract to a solemn form”. There is
Construction Management contracts, the owner retains a contractor
no particular form required for construction contracts. However,
to perform engineering, procurement and construction management
there are laws governing public bodies that require them to follow
services. The contractor is usually retained before construction
certain formalities; for example, requiring the public body to launch
starts through project close-out, and sometimes through the
a tendering process.
warranty period. Public Private Partnerships involve a partnership
between a public owner and a private contractor to construct a
project. This may involve various delivery methods and services 1.3 In your jurisdiction please identify whether there is
including designing, building, financing, transferring, operating and a concept of what is known as a “letter of intent”, in
maintaining the project. which an employer can give either a legally binding or
Parties often use standard form contracts which have been developed enter into a contract later or to commit itself to meet
by industry associations and include the Canadian Construction certain costs to be incurred by the contractor whether
Document Committee (CCDC), the Canadian Construction or not a full contract is ever concluded.
Association, and other local organisations such as the Construction
Owners Association of Alberta. Letters of intent are used and may be enforceable if they meet the
CCDC has recently released a form of Integrated Product Delivery requirements of a contract detailed above. However, if the letter of
(IPD) contract. IPD contracts are single, multiparty contracts that intent is in substance an “agreement to agree”, it is not enforceable.
often involve multiple trades in addition to the contractor and In the construction context, letters of intent are often used to allow
consultant. IPD contracts are relatively new to Canada, but are contractors to commence performance of a limited scope of work
becoming increasingly popular. prior to the completed negotiation and execution of a more fulsome
construction contract.

Miller Thomson LLP Canada
Employers are required to withhold and remit to the government

1.4 Are there any statutory or standard types of insurance income tax, employment insurance premiums and Canada Pension
which it would be commonplace or compulsory to Plan contributions on behalf of employees.
for contractors in respect of death and personal 1.6 Is the employer legally permitted to retain part of
injury, or is there a requirement for the contractor to the purchase price for the works as a retention to be
have contractors’ all-risk insurance? released either in whole or in part when: (a) the works
Canada

The three most common types of insurance policies include:
1. Builder’s Risk/Course of Construction policies for physical
loss or damage to property in the course of construction, Most provinces have lien legislation which requires a certain
installation or repair. These are typically obtained by the percentage of the value of the work to be held back (typically 10%,
owner or contractor. but this differs between provinces). Outside of lien legislation, any
2. Wrap-up Liability policies, naming all or most of the right to holdback funds is a matter of contract. The parties may
participants in the project. These are typically obtained by the agree to different amounts of holdback for different purposes. For
owner or contractor. example, owners may contract to hold back certain amounts in
3. Errors and Omissions Professional Liability policies for design relation to deficiencies. Typically, a statutory holdback cannot be
professionals’ negligence. These are typically obtained by the applied to deficiencies.
engineers and architects. In some provinces, such as Alberta, only the owner is statutorily
Other types of insurance common in construction contracts include: required to hold back 10% of the total value of the work rendered.
General Liability Insurance; Automobile Liability Insurance; Tools However, parties lower down the contractual chain may agree that
and Equipment Insurance; and Subcontractor Default Insurance. one party may hold back a certain amount of money from each
If the construction project has environmental risks, supplemental payment. However, legislation in other jurisdictions, such as
polices may be required to cover them. Ontario and British Columbia, requires the owner, the contractor
and each subcontractor to hold back 10%.
Some provinces in Canada have legislation requiring new home
warranty insurance. Also, each province has a statute regarding Typically, the owner is required to hold back the applicable
workers’ compensation, in which the employer pays a premium and percentage of funds for a specific period of time after the work on
the project is complete/substantially complete or, if a certificate of
employees are insured for the replacement of wages in the event of
substantial performance is issued. Assuming no liens are filed, the
injury. The statute abrogates a worker’s right to sue the employer,
holdback can be released. In some provinces, the amount that must
other employees, and other employers and their employees in
be retained is reduced to an amount for finishing the work. Some lien
industries to which the legislation applies. Employers’ Liability
legislation provides for earlier and progressive release of holdbacks.
insurance is necessary to cover anyone coming to site not covered
by workers’ compensation. In Québec, the Civil Code provides that a subcontractor or supplier
may register a lien (construction hypothec) for improvements to
land, even though they have no contract with the owner. However,
1.5 Are there any statutory requirements in relation the lien is limited to the work done after the subcontractor or supplier
to construction contracts in terms of: (a) general
provides written notice of their contract to the owner. Consequently,
the owner may deduct from the price of the contract an amount
sub-contractors); (c) tax (payment of income tax of sufficient to pay their claims. The deduction is valid until such time
employees); or (d) health and safety? as the contractor gives the owner a release from such claims.
On large projects, financial security may replace the lien holdback
Construction projects, and those working on them, must comply such that funds can be advanced without deduction. Some provinces,
with applicable local legislation. Provincial employment legislation such as Saskatchewan, provide for the early release of the holdback
generally sets various minimum standards that employers must meet on large projects of long duration.
(e.g. hours of work, minimum wages, vacation, etc.). Ontario recently passed legislation creating new rules governing
Each province also has occupational health and safety legislation holdback. It allows for payment of holdbacks on an annual, phased
which imposes a duty on employers to ensure the health and safety or segmented basis. Parties may retain holdbacks in the form of
of workers engaged in the work and those at the worksite. Workers a letter of credit or repayment bond rather than in cash. Release
are obligated to take reasonable care to protect their own health and of holdbacks is now mandatory once all conditions are satisfied.
safety and that of other workers on site, and to cooperate with the However, holdbacks may be withheld if the payer publishes the
employer to ensure the same. requisite notice in accordance with the regulations. If the payer
fails to do so, there is no right of set-off against the holdbacks.
In many provinces, occupational health and safety legislation
Contractors and subcontractors who are not paid holdbacks may
requires that a prime contractor or principal contract be designated
refuse to pay related holdbacks to its subcontractors, provided that
(otherwise it will be the owner). The designated party is responsible
notice is given and the matter is referred to the adjudicative process
for ensuring that health and safety requirements are complied with. set out in the legislation.
The Criminal Code of Canada also imposes criminal liability on
organisations and individuals that do not take reasonable steps to
prevent workers from being injured or killed on the job. bonds (provided by banks and others) to guarantee
The federal government has jurisdiction over criminal matters. It performance, and/or company guarantees provided to
also has exclusive jurisdiction over certain specific industries such guarantee the performance of subsidiary companies?
as aviation and interprovincial transportation. Federal labour and Are there any restrictions on the nature of such bonds
and guarantees?
employment legislation applies to construction projects undertaken in
these industries, such as airports, inter-provincial pipelines, railways
and highways. Sureties issue performance bonds on some projects. The bonds are

typically a standard form involving three parties: the surety; the

contractor; and the owner. The surety and contractor guarantee to
the owner that the loss event will not occur.
Typically, the owner will not be able to draw on the bond unless the 2.1 Is it common for construction contracts to be
contractor is in default, and the owner is not in default. The surety supervised on behalf of the employer by a third
can then recover from the contractor after making payment on the party? Does any such third party (e.g. an engineer
bond for the benefit of the owner.
Canada
The Supreme Court of Canada recently held that the trustee of a it only one which exists in certain situations? If so,
labour and materials payment bond had a duty to disclose the please identify when the architect/engineer must act
existence of the bond to potential beneficiaries, marking a shift in impartially.
the law. Trustees should now be aware that they may have a duty to
inform potential beneficiaries of the existence of a bond. An owner may retain an engineer, architect or engineering firm to act
Alternatively, owners may request letters of credit to be issued by as a consultant. The contract will set out the role of the consultant.
a lender on behalf of the contractor. Letters of credit are flexible A consultant owes a duty of care to the owner in administering
security that owners may call upon at any time. Unlike performance the contract or authorising any alterations or additions to the
bonds, where the surety issuing the bond will review and assess project. However, a consultant also has a duty to be an impartial
any alleged default before responding, letters of credit are payable adjudicator when disputes arise between the owner and contractor.
immediately on demand and without further substantiation, making For example, in a CCDC 2 contract, the consultant has the authority
them useful security for owners. to resolve matters in regards to contract interpretation, performance
Parent companies may give a guarantee to ensure the performance of the work, or any other matters in which agreement is necessary
of a subsidiary. Each bond and guarantee is limited to the wording but cannot be reached. The consultant’s role as a first arbiter
of the particular instrument. Provincial legislation often provides cannot be biased by its role as a representative of the owner. The
that a person providing a guarantee must do so in the presence of a consultant has a duty to adjudicate the dispute in a fair, unbiased,
notary public or a lawyer. and professionally competent manner.
In all provinces, architects and engineers must also follow their
respective codes of ethics.
retention of title rights in relation to goods and Sometimes contracts include a supplementary condition for a waiver
supplies used in the works? Is it permissible for of claims against the consultant’s interpretations and findings in a
contractors to claim that until they have been paid dispute resolution process.
materials supplied from the site? In Québec, if an architect or engineer supervised the work and a
loss associated with the work occurs within five years after the work
was completed, the liability of the supervisor is presumed. The
Some construction contracts include retention of title rights in
supervisor will have to prove that the defect is not due to its own
relation to goods and supplies used in the work. Some contracts
acts to be relieved from liability.
will explicitly provide for the precise time when title passes (e.g.
upon delivery of goods, or once the supplier is paid).
Under provincial Personal Property Security legislation, if a party to 2.2 Are employers entitled to provide in the contract that
they will pay the contractor when they, the employer,
a contract has an attached/perfected a security interest, it may retain
title rights in relation to that good. If the contractor holds a security include in the contract what is known as a “pay when
interest in the goods/materials supplied, it may be entitled to seize paid” clause?
and sell the property to discharge the debt owed.
In Québec, a supplier of materials could benefit from a reservation A construction contract may include a “pay when paid” clause.
of ownership in respect of the materials if it is stipulated in a contract The validity of a “pay when paid” clause, by which the contractor
and if it has been published in the register of personal and movable does not have to pay a subcontractor until the owner has paid the
real rights. Then, the supplier of materials may take the property contractor, has been recognised in Québec by the Court of Appeal.
back or force the buyer or the owner to pay the sale price. If the However, the contractor may be found to have a duty to collect the
materials have been integrated into the work, the seller can force the amounts owing.
owner to pay, but may not take them back. Some clauses have been interpreted to be condition precedents to the
Unpaid contractors and suppliers may also make use of provincial legal entitlement to payment, whereas others have been interpreted
builders’ lien legislation, which entitles them to register a lien as an intention to address the timing of the payment in the clause,
against the project lands (within a prescribed time) in relation to not the actual right to payment.
unpaid goods which have been furnished to the project site, and then Further, a “pay when paid” clause does not forfeit lien rights of
call upon those lands as security for unpaid amounts. Provincial lien subcontractors, and lien legislation typically grants subcontractors
legislation also includes trust provisions as an additional remedy to the ability to obtain information about the status of payment on the
unpaid contractors. However, the extensiveness of the trust created project.
varies from province to province. In certain circumstances, unpaid
In Ontario, the new Construction Act creates a prompt payment
contractors who have not yet delivered goods or materials can also
regime with strict timelines for payment, in force as of 1 October
assert a possessory lien over such materials.
2019. The regime requires a contractor to pay a subcontractor within
seven days of payment by the owner, and requires a contractor to
provide notice of non-payment to subcontractors within seven days
of receiving notice of the same from the owner. Otherwise, the
contractor must pay a subcontractor within 35 days of receipt of

a subcontractor’s invoice. A failure on the part of a contractor to

give the required notice of non-payment to a subcontractor could, 3.3 Are there terms which will/can be implied into a
presumably, preclude that contractor from relying on a “pay when
paid” clause in the subcontract as a basis for non-payment of that
subcontractor within 35 days. Courts may imply terms into a contract in order to establish the
nature and scope of the contractual agreement. This is done in the
following circumstances: when the contract is of a kind in which the
Canada
implied term has historically been found; when the term is necessary
sum (known as liquidated damages) which will be
given the surrounding circumstances (e.g. to give business efficacy
particular breaches, e.g. liquidated damages for late to the transaction); when there is a term of art used or notorious
completion? If such arrangements are permitted, are business custom that can be said to govern the relationship between
there any restrictions on what can be agreed? E.g. the parties (so long as it is not contrary to an express contractual
does the sum to be paid have to be a genuine pre- provision); the implied term is consistent with the parties’ presumed
estimate of loss, or can the contractor be bound to intentions (so long as it is not contrary to an express contractual
pay a sum which is wholly unrelated to the amount of provision); or when a statute implies a term (e.g. Sale of Goods
legislation may include implied terms that the seller has the right to
sell the goods, and that the goods are reasonably fit for their purpose
Construction contracts may provide for liquidated damages in the if the buyer makes known the purpose).
event of certain acts of default, such as delays in completion, by the
There is a general duty of honesty in contractual performance which
contractor. Liquidated damages must be a genuine pre-estimate of
is implied into contracts and requires that parties not lie or mislead
loss arising from the delay (e.g. lost rent for an apartment complex).
each other on matters linked to the performance of the contract. The
Unreasonable amounts for liquidated damages (typically assessed
principle of good faith is codified in the Québec Civil Code.
at the time the amount was negotiated) are interpreted as a penalty
and are unenforceable. Sections 1622 to 1625 of the Québec Civil
Code address penal clauses, and grant courts the power to reduce the 3.4 If the contractor is delayed by two events, one the
amount of a penalty if the clause is abusive. fault of the contractor and one the fault or risk of
his employer, is the contractor entitled to: (a) an
extension of time; or (b) the costs occasioned by that
3 Common Issues on Construction concurrent delay?
Contracts
Where both the contractor and owner contribute to the delay, or
where there are concurrent delay events, each caused by a different
3.1 Is the employer entitled to vary the works to be done party, fault will generally be divided and apportioned based on the
under the contract? Is there any limit on that right? extent to which each delay caused any resulting losses.
Construction contracts generally contain delay provisions. Some limit
Construction contracts in Canada generally contain contract change the remedies available as a result of delay. Where acts or omissions
provisions which allow the owner to vary the scope or time to of the owner are the cause of the delay, delay provisions may provide
complete the contract. If there are no such provisions and there is a for a reasonable extension to the contract time, and the reimbursement
change, a court will look to the conduct of the parties to determine of the contractor’s reasonable costs incurred as a result. Notice in
whether they have agreed to a change to the contract. Generally, a writing of the delay by the contractor is normally required.
change in scope must remain within the overall contemplated scope In situations of concurrent delay, the contract between the parties
of the project and cannot extend to something wholly different. should first be examined to determine whether it provides an answer
Even where formal change provisions exist, if the change process as to how the allocation of liability for any concurrent delay should
has not been followed, the courts may look to the conduct of the be considered.
parties to determine whether the contract change provisions have Otherwise, courts may apportion the various causes of delay
been waived, and whether there has been a change to the contract. between the parties based on the applicable contributory negligence
Contracts often have notice requirements for claims, such that legislation or by analogy to such legalisation. If the court finds
contractors will be required to make a claim in a certain time period there is contributory negligence on the part of the contractor and
or risk losing their entitlement to recover amounts for it. the owner, which contributory negligence affected the critical path
to project completion, the court will apportion the delay damages
between the owner and contractor.
omitted, can the employer do it himself or get a third In the event that the contractor would not have been able to perform
party to do it? the contract due to its own act of delay, regardless of the existence
of an owner-caused delay, the contractor will be held liable for delay
Work can be omitted from the contract if the change provisions in damages.
the contract allow for it. Most template forms allow for changes
upon appropriate notice provisions being met. If the owner has 3.5 If the contractor has allowed in his programme a
the ability to remove work from a contractor, the owner may find period of time (known as the float) to allow for his own
another contractor to perform the work or do it himself. delays but the employer uses up that period by, for
Absent contractual provision that work may be removed, an owner example, a variation, is the contractor subsequently
entitled to an extension of time if he is then delayed
could face a claim in contract for lost revenues or lost profits if it
after this float is used up?
self-performs or awards the work to another contractor.
Where a contract specifies a contract time, or time for substantial

performance of the work, the contractor may, regardless of the

existence of a float, make use of the entire time period up to the a provision which identifies which party will be responsible if there
specified contract time to perform the work. The owner may not is a change in law. These changes may include: environmental law
interfere with the contractor’s time for substantial performance of changes; zoning changes; or building code changes. Ideally, the risk
the work. Where the obligation to perform a contract is at large, is placed on the person who is responsible for the particular portion
the contractor is obligated to complete the work within a reasonable of the risk (e.g. contractors typically bear the risk of a change in
time and the owner is not entitled to prevent timely completion of building code).
the contract.
Canada
The jurisprudence in Canada does not establish who owns the float. 3.9 Who usually owns the intellectual property in relation
However, courts have held that, in the event of an owner-caused to the design and operation of the property?
delay which consumes the float but which does not delay the date
of completion, the contractor will not be entitled to damages on that Unless changed by the contract, the designer retains the intellectual
account. If, on the other hand, the owner-caused delay consumes property in the design. The owner typically retains copies of
the float, and thereafter there is a contractor-caused delay which drawings, blueprints, models or other work, but cannot use them
delays the date of completion, the contractor may be entitled to an for other projects without the consent of the designer of the work,
extension of time equal to the duration of the float. The contractor or unless it obtains a licence from the designer to use the work.
has a duty to mitigate any owner-caused delay. Owners often require the right to use the intellectual property for
the purpose of operating or maintaining the project, and will also
3.6 Is there a limit in time beyond which the parties to require an assignment of any intellectual property resulting from the
a construction contract may no longer bring claims use by the designer of any of the owner’s confidential information
against each other? How long is that period and from in the design process.
Other intellectual property issues may arise in construction projects;
for example with patented products, processes, devices or designs.
Every province has limitation legislation which governs the time If the owner does not obtain the intellectual property rights, the
limits for bringing an action. A two-year basic limitation period is owner will need to obtain a licence to use the intellectual property,
typical and an action must be commenced within two years from and potentially to have others maintain the equipment.
when the party knew or ought to have known about the harm, which
is an objective assessment.
Each province also has an ultimate limitation period which varies
in length (e.g. 10 years in Alberta and 15 years in Ontario). The
Construction contracts often contain provisions allowing the
ultimate limitation period starts from the date when the act or
contractor a right to suspend the work if, for example, the owner
omission occurred, not when the damage may have been discovered.
has not paid, or if the work is suspended for a certain number of
In Québec, an action must be brought within three years, and starts days (not as a result of the contractor). If the contract does not
to run from the time when the cause of action is known (for instance, have a clause regarding suspension, the courts will consider whether
when the contractual amounts are owed). For an ongoing contract, the owner is in default of its obligations under the contract to a
the starting point is when the work is completed. Where the right of substantial degree in order to determine whether the contractor had
action arises from a material injury appearing progressively or tardily, the right to suspend the work.
the period runs from the day the injury appears for the first time.
If the contract has a force majeure provision, a party may have
Contracts often contain clauses providing that the contractor must additional rights to suspend the work if an event qualifies as an event
give notice to the owner if it intends to bring a claim. of force majeure (see also question 3.12).
Limitation periods may be extended by contract, but may not be
shorted unless the applicable provincial limitation legislation
expressly permits it. there any grounds which automatically or usually
3.7 Who normally bears the risk of unforeseen ground Do those termination rights need to be set out
conditions? expressly?
Which party will bear the risk of concealed or unknown ground Construction contracts often provide for termination where, for
conditions depends on the contract. Absent contractual terms example, the other party is bankrupt or insolvent, the work is
providing for compensation or extra time on account of materially suspended or delayed for a period of time, or the other party fails to
different subsurface conditions, the contractor may be at risk. perform certain obligations under the contract. These termination
Many contracts provide for testing ahead of time, or contain a site for cause provisions typically contemplate notice and a period of
inspection clause which requires the contractor to declare itself time for the party in default to cure its breach.
satisfied of the ground conditions based on the information available. The contract may also include a termination for convenience clause
However, where there is a hidden risk known to the owner but not which may permit one or both parties to terminate the contract “at
the contractor, the owner may be liable to the contractor regardless will”, and set out the compensation to be paid upon termination.
of the existence of a site inspection clause or contractual provision. Under the common law, certain terms of the contract which are
essential or sufficiently important may be found to be conditions
3.8 Who usually bears the risk of a change in law which, if breached, allow the innocent party to terminate the
affecting the completion of the works? contract.
Absent termination provisions in the contract, the common law
Absent a contractual provision, a contractor will often bear the risk doctrine of repudiation will apply where one party unequivocally
for a change of law. However, construction contracts often include indicates its intention not to be bound by the terms of the contract.

In such a case, the innocent party may elect to accept the breach, and party may benefit from contractual provisions to which they were
bring the contract to an end, or affirm the contract, in which case the not a contracting party under a common law principled exception to
contract continues. Whether it accepts the repudiation or affirms the the third party beneficiary rule. Courts require clear language to find
contract, the innocent party may sue for breach of contract. that parties intended to assume liability to a third party.
In Québec, two kinds of resiliation/termination may occur: 1) the A third party may bring a claim of negligence against contractors,
owner may unilaterally terminate the contract even though the work designers, and engineers involved in the construction of a building.
or provision of service is already in progress, as long as he pays These people owe a duty to use reasonable care to prevent damage
Canada
to the contractor in proportion of the agreed price, the actual costs to parties who they should reasonably expect to be affected by their
and expenses, the value of the work performed before the notice work. This duty is owed to subsequent building purchasers if it is
of termination and, as the case may be, the value of the property foreseeable that a failure to meet the reasonable care standard would
furnished; or 2) any party may terminate the contract if the contractor result in defects that create real and substantial danger to health and
fails to properly perform the work or comply to a substantial degree safety.
with the contract. In such case, the owner may finish the work itself Most provinces have legislation regulating warranties on newly
or with another contractor, so long as termination was in accordance built homes, under which subsequent owners may have a claim.
with the terms of the contract. Warranty coverage varies across provinces.
3.12 Is the concept of force majeure or frustration known 3.14 Can one party (P1) to a construction contract which
in your jurisdiction? What remedy does this give owes money to the other (P2) set off against the sums
the injured party? Is it usual/possible to argue due to P2 the sums P2 owes to P1? Are there any
successfully that a contract which has become limits on the rights of set-off?
Canadian law recognises legal and equitable set off, and construction
Both force majeure and frustration are known. Contracts may contracts may provide for contractual set-off in specific situations.
contain force majeure clauses that define force majeure events; for In the absence of a contractual right of set-off, parties to a contract
example tornadoes, fires, labour strikes, acts of war, etc. In the may, in certain circumstances, be entitled to legal or equitable set-
clause, the parties may agree to notice provisions, and that, if such off.
an event occurs, neither party is at fault nor entitled to damages. The
force majeure event may suspend obligations under the contract, Legal set-off requires two conditions be fulfilled: first, that both
and may lead to contract termination. Typically, the parties will not obligations be debts which are for liquidated sums or money
be permitted to rely on an uneconomical contract as a ground for demands that can be ascertained with certainty; and, second, that
force majeure. In the absence of a contractual term, there is no right both debts be mutual cross-obligations. The right to legal set-off is
to claim force majeure. subject to statutory limitation periods in Canada.
In Québec, if a contract stipulates which party will assume the Equitable set-off can be distinguished from legal set-off on the basis
risk of force majeure, the clause supersedes what is provided by that it applies in the absence of mutuality, and where the cross-
the Civil Code. The Civil Code provides that a debtor is released obligations are not for liquidated sums or money demands. While
where he cannot perform an obligation by reason of a force majeure equitable set-off is not subject to statutory limitation periods, and
event which occurred before he was in default. If the debtor was in the claim and cross-claim need not arise out of the same contract,
default, a debtor is nonetheless released if the creditor could not in the party relying on the set-off must show an equitable ground
any case benefit from the performance of the obligation by reason of which goes to the very root of the other party’s claim.
that force majeure event.
Frustration may occur if circumstances change such that it becomes 3.15 Do parties to construction contracts owe a duty of
impossible for one party to fulfil its obligations under the contract. care to each other either in contract or under any
If such a change occurs, performance will no longer be required,
though it is not necessarily the case that all obligations under the
contract will come to an end. The parties may address events of Each party to a construction contract owes a duty of care to one
frustration, and allocate responsibility to the party in the best another. A contract may be constructed to limit or exclude a party’s
position to manage the risk of the event. Frustration only serves to contractual or tortious liability. If the contract specifies a limitation
end a contract in whole; it cannot be used to suspend performance clause for liability for a specific matter or type of conduct, a party
or to partially terminate a contract. cannot sue in tort to circumvent the contractual clause. A party may
bring an action under either contract or tort, but may not recover
damages under both.
entitled to claim the benefit of any contract right If a contract does not specify a standard of care, the parties are held
which is made for their benefit? E.g. is the second or to a reasonable standard of care of an ordinary person with similar
subsequent owner of a building able to claim against expertise. For example, an engineer, contractor or subcontractor will
the original contracts in relation to defects in the be held to the standard of care of a person with similar knowledge
building? and expertise.
In Québec, the subsequent owner can benefit from legal warranty

obligations resulting from a contract to which they were not the ambiguous, are there rules which will settle how that
contracting party. ambiguity is interpreted?
A third party is not normally entitled to claim a right or benefit under
a contract to which it is not a party at common law. However, Courts If the language of the written contract is clear and unambiguous,
have recognised exceptions to this doctrine, including agency, trust, then no extrinsic evidence may be admitted to alter, vary, or
and assignment. If these recognised exceptions do not apply, a third interpret in any way, the words used in the contract. Construction

contracts usually contain interpretation provisions, such as priority ensuring that plans and specifications are generally complied with,
provisions, which clarify which document has priority in the event it is usually not responsible for carrying out the work. Therefore,
of a conflict between terms. the designer’s obligations do not provide an absolute guarantee of
Courts prefer a common-sense approach to determine the intentions perfect compliance with the design, nor supervision of every single
of the parties over the application of technical rules of construction. thing that is done on the project; however, designers are expected to
Courts will thus consider the ordinary and grammatical meaning of supervise critical stages of the work.
the words, in light of the surrounding circumstances at the time the
Canada
contract was entered into.
Where a term of a contract is found to be ambiguous, extrinsic
evidence regarding the parties’ objective intentions, and objective
evidence of the factual matrix underlying the negotiation of the 4.1 How are disputes generally resolved?
contract, but without reference to the subjective intention of the
parties, may be admitted to interpret the contract and resolve the Dispute resolution provisions in construction contracts vary. Often
ambiguity. there is a tiered process where disputes are resolved first by the
As an interpretive tool of last resort, the court may apply the doctrine consultant, then negotiation, then mediation and/or arbitration.
of contra proferentem, and interpret ambiguous contractual terms These stages could be mandatory and have timelines in which
against the drafter. they must be met before moving to the next stage. Where there is
a mandatory arbitration clause, the court will refrain from taking
jurisdiction over the dispute. In some provinces, one party may
apply to the court for summary judgment of a matter which may
are unenforceable?
otherwise be arbitrable, if the issues can be determined by way of
summary judgment.
Courts will generally uphold the right of freedom of contract – only
in rare circumstances will they relieve a party from its bargain. As If the parties do not contract into the alternative dispute resolution
a general rule, a term of a contract will be unenforceable where it methods described above, they can have their dispute resolved by
is unconscionable, or where it is contrary to public policy or statute the court.
(e.g. annual rates of interest over 60% will not be enforceable, and
terms of contracts that purport to contract out of provincial lien 4.2 Do you have adjudication processes in your
legislation may be void). jurisdiction? If so, please describe the general
Exclusion of liability clauses may be found to be unconscionable procedures.
in certain circumstances, such as where there is a power imbalance
between the parties. While exclusion of liability clauses are The adjudication of construction litigation varies from province to
generally enforceable, they are strictly interpreted (see also question province and generally there are no specific adjudicative processes
2.3). in Canada focused on construction. In Ontario, a specialised
construction lien court has been created which is administered by
In Québec, some warranties are created by statute, and, therefore,
case management masters, but this court only has jurisdiction for
cannot be voided by contractual provisions (for instance, the
projects within the City of Toronto.
warranty in the Civil Code for the loss of the work that occurs within
five years after the work is completed). Also, an abusive clause,
which is excessively and unreasonably detrimental to the adhering 4.3 Do your construction contracts commonly have
party, in a contract of adhesion may be reduced. arbitration clauses? If so, please explain how

of design and/or the contract is one for design only, Many construction contracts have arbitration clauses but not all.
are the designer’s obligations absolute or are there They may be mandatory or permissive. If the clause is merely
limits on the extent of his liability? In particular, does permissive, in order to proceed with arbitration, the parties must
the designer have to give an absolute guarantee in subsequently agree to arbitrate.
respect of his work?
Arbitration clauses vary in complexity and may range from a simple
agreement to arbitrate, or set out details such as the number of
A professional designer may have specific obligations to the client arbitrators, the selection process, the seat and any rules that apply
expressed in the contract. However, the contract may also include to the arbitration.
exclusion clauses which limit the liability of the designer. In the
absence of the parties providing for the obligations in their contract, If the parties set out arbitration rules, those rules typically provide
under tort law, a designer has a duty to act with the reasonable skill, the framework for the arbitration. Otherwise, the parties may agree
care and diligence expected of a designer of ordinary competence. to the procedure at the start of the arbitration or the arbitrator will
determine the process (e.g. document exchange, witnesses, timing,
Unless the contract provides otherwise, a designer is typically liable
etc.). The arbitration hearings also depend on the type of dispute
if the design was defective due to negligence. The standard of care
being heard. In Québec, if there is no specific procedure to follow
for a design professional is not a guarantee that the work will be to
stipulated in the contract, the rules codified in the Code of Civil
the owner’s complete satisfaction nor that the work be successful, so
Procedure (CCP) will apply.
long as the work was done competently and non-negligently.
Each province has arbitration legislation, but the legislation does
The designer may have a duty to ensure the project is constructed in
not set out the detail of the arbitration procedure. That detail is
accordance with its plans, and satisfies the necessary specifications,
instead set out in the rules of arbitration the parties may choose, as
building codes, and bylaws. These obligations are typically known
mentioned above.
as field review services. Although the designer is responsible for

Parties thus, at times, choose to adopt third-party rules (or a variation documents, conduct discovery/questioning, and retain experts.
of them), such as the CCDC Rules for Arbitration of Construction Some Rules of Court have mechanisms to encourage settlement,
Disputes or the UNCITRAL Arbitration Rules. Canadian courts like mediation, and rules relating to settlement offers which impose
will assist in the enforcement of arbitral awards. enhanced cost consequences if a rejected offer to settle is better than
the final award by a court.
4.4 Where the contract provides for international The timing of court proceedings varies. Large, complex cases may
arbitration, do your jurisdiction’s courts recognise take several years to get to trial. If an appeal is possible, one party
Canada
and enforce international arbitration awards? Please may appeal the decision to the provincial Court of Appeal. The
advise of any obstacles to enforcement. decision of a Court of Appeal may also be appealed to the Supreme
Court of Canada; however, the party seeking to appeal will need to
Yes, in 1986, Canada ratified the UN Convention on the Recognition seek leave of the court before having their appeal heard.
and Enforcement of Foreign Arbitral Awards and each province has
Simpler cases may be resolved summarily which allows for a faster
enabling legislation for the New York Convention as well as the
decision. If the claim is below a threshold amount, each province
Model Law on International Commercial Arbitration.
has a small claims court which has a simplified procedure and
Other than the provisions of Article V of the New York Convention, shorter time frame in which a trial of the matter is heard. Decisions
one recent obstacle to enforcement is that the arbitral award must be from small claims and provincial courts can also be appealed.
brought for enforcement within the applicable provincial limitation
The CCP of Québec codifies the obligation for the parties to
period (see question 3.6).
consider private prevention and resolution processes before
referring their dispute to the courts. The CCP also codifies that
4.5 Where the contract provides for court proceedings the courts are to facilitate conciliation when required, the parties
in a foreign country, will the judgment of that foreign request it, circumstances permit, or if a settlement conference is
held. The parties may agree to settle their dispute through a private
dispute resolution process or judicial conciliation and they may also
A judgment of a foreign court may be upheld in Canada. A otherwise terminate the proceeding at any time. The CCP provides
prerequisite to enforcement is that the foreign court had a real and rules for settlement conferences before a judge, mediation and
substantial connection with the parties or subject of the dispute, or arbitration.
another basis of jurisdiction was satisfied. There need not be a real
and substantial connection between the dispute or the defendant and
the province in which recognition and enforcement is being sought. Acknowledgment
The judgment must also be final and conclusive.
The authors would like to thank all lawyers and students from across
Canadian courts will only enforce a foreign judgment that is fair and the country at Miller Thomson who provided assistance in preparing
does not offend Canadian public policy. this chapter, with special thanks to Fergus Schappert, Andréanne
Several provinces have statutes that govern the reciprocal Sansoucy, Nick Willis and Haley Edmonds.
enforcement of judgments that may allow a party to apply to the Fergus Schappert practises construction law and commercial
courts for an order registering the foreign judgment. However,
litigation in Edmonton, Alberta (Tel: +1 780 429 9737 / Email:
recognised reciprocal jurisdictions may vary across provinces.
fschappert@millerthomson.com).
Andréanne Sansoucy has expertise in Québec construction law and
4.6 Where a contract provides for court proceedings in the Québec Civil Code (Tel: +1 514 871 5455 / Email: asansoucy@
millerthomson.com).
how long proceedings are likely to take to reduce: (a) Nick Willis practises construction law and commercial litigation
a decision by the court of first jurisdiction; and (b) a in Edmonton, Alberta (Tel: +1 780 429 9459 / Email: nwillis@
decision by the final court of appeal. millerthomson.com).
Haley Edmonds practises construction law and commercial litigation
The process is governed by the Rules of Court of each province in Edmonton, Alberta (Tel: +1 780 429 9410 / Email: hedmonds@
which set out the requirements to, inter alia, start a proceeding,
millerthomson.com).
respond, bring third-party claims and cross claims, exchange

William J. Kenny Leanna Olson

Miller Thomson LLP Miller Thomson LLP
3000, 700 – 9th Avenue SW 3000, 700 – 9th Avenue SW
Calgary, Alberta Calgary, Alberta
Canada Canada
Tel: +1 403 298 2404 / +1 780 429 9784 Tel: +1 403 298 2417
Canada
Fax: +1 403 262 0007 Fax: +1 403 262 0007
Email: wkenny@millerthomson.com Email: lolson@millerthomson.com
URL: www.millerthomson.com/en URL: www.millerthomson.com/en
Bill Kenny is a Partner in the Edmonton and Calgary offices of Miller Leanna Olson advises clients on litigation and construction law
Thomson. As general counsel, Bill practices civil and regulatory matters. Her practice focuses on the construction industry, including
litigation, construction law, transportation, insurance and corporate residential, commercial, infrastructure and industrial projects.
commercial law.
Leanna helps clients at the initial stage of projects by reviewing
Bill has written many articles and participated in seminars dealing with contracts, contract negotiations, and drafting custom-built contracts.
litigation, construction law and directors’ liability. He has appeared When disputes arise, Leanna assists with reviewing and advising
before all levels of court in Alberta, Saskatchewan and the Northwest on the issues and helps navigate through negotiation, mediation,
Territories, as well as before numerous agencies, boards and tribunals. arbitration or litigation, as necessary.
He has appeared as counsel before international commercial
Leanna has worked on various lien claims, deficiency claims,
arbitration panels in London and Paris. Bill has acted for construction
negligence claims and contract disputes. She has experience in small
contractors, consulting engineers and owners, with experience in all
claims trials, questionings, negotiations, mediations and large litigation
forms of claim related events and forms of dispute resolution as well as
matters.
the preparation of contract documents. He has also been appointed
as arbitrator and mediator in many commercial disputes.
Miller Thomson LLP, one of Canada’s leading national law firms, is dedicated to the Canadian market. We have close to 550 lawyers in 12 offices
nationally, and the broadest geographic reach of any Canadian law firm. Miller Thomson is uniquely positioned to provide ‘on the ground’ insight and
knowledge from the country’s key economic hubs, and under both the common law and civil law systems in Canada. We are able to consistently
deliver the highest quality advice, advocacy and expertise required by Canadian or international clients doing business in Canada.
Our Construction and Infrastructure industry group includes lawyers who are available and experienced to assist with a variety of legal needs. We
represent domestic and foreign owners, developers, engineers, architects, contractors, and subcontractors in the project development process and
in dispute resolution. Our expertise extends from simple to complex projects involving a variety of delivery models.

Chapter 8
England Tim Reid
Ashurst Michael J. Smith
■ “construction management”, where the employer appoints

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

Ashurst England
FIDIC is due to launch a second edition of its Yellow Book later in essential terms and is expressed to terminate upon the execution of
2017, with second editions of the Red Book and the Silver Book to a formal contract. This is commonly followed by the execution of
follow. a detailed formal contract, which is often based on a standard form.
Management contracting Currently, we are seeing an increasing amount of two-stage
Management contracting arrangements are sometimes used in tendering, involving “ECI” (Early Contractor Involvement). ECI
England for large-scale Engineering, Procurement and Construction involves appointing the contractor at an early stage in the project, the
idea being that collaboration and communication between all those
England
Management (“EPCM”) projects. These are usually bespoke and
heavily negotiated contracts as there is currently no standard form involved at the outset will benefit project outcome in the long run.
EPCM contract used in England. It is not uncommon, however, NEC4 ECC provides for ECI in its optional clauses, and envisages
to see parties starting with a standard form consultancy agreement, a two-stage contract: at stage 1 the contractor participates in design
and making substantial amendments to reflect the unique role of the development and planning; and at stage 2 detailed design and
Managing Contractor. construction takes place. Where ECI is used, the employer/developer
is typically free at the end of stage 1 to choose not to proceed to stage
2 with the contractor, without incurring financial penalty.
law jurisdictions, offer, acceptance, consideration 1.4 Are there any statutory or standard types of insurance
and intention to create legal relations), or any which it would be commonplace or compulsory to
specific requirements which need to be included in a have in place when carrying out construction work?
construction contract (e.g. provision for adjudication For example, is there employer’s liability insurance
or any need for the contract to be evidenced in for contractors in respect of death and personal
writing)? injury, or is there a requirement for the contractor to
The Housing Grants, Construction and Regeneration Act 1996
(the “Construction Act”) applies to all “construction contracts” Typically, a domestic construction contract will require the
(contracts for the carrying out of, or for arranging for the carrying following insurances:
out of, “construction operations”) in England and Wales. The ■ insurance of the works (usually referred to as “Construction
Construction Act was amended in October 2011 by Part 8 of the All-Risks” insurance) – taken out by either the employer or
Local Democracy, Economic Development and Construction Act the contractor covering loss or damage to the work executed
2009 (the “LDEDC Act”) which provided that it is now no longer and site materials up to practical completion in the joint
necessary for a construction contract to be in writing. This means names of both parties to the contract;
that there are now no legally essential qualities required under ■ public liability insurance – covering claims in relation to
English law to create a legally binding construction contract other death or injury to third parties or damage to property other
than the usual English law principles of contract formation, which than the construction works;
requires an intention to create legal relations and the key elements of ■ employer’s liability insurance – required by statute
offer, acceptance, consideration and certainty of terms. (Employer’s Liability (Compulsory Insurance) Act 1969) to
However, certain compulsory payment provisions (aimed at be taken out by the contractor to cover the health and safety
of its employees; and
securing the flow of cash down the construction supply chain) are
required to be included in all “construction contracts” (as defined ■ professional indemnity insurance (“PII”) – to cover design
under the Construction Act) and all contracting parties are given a liability and to be taken out by any party carrying out design
statutory right to refer disputes to adjudication. If the parties fail to (including the contractor where it is undertaking some
design under the contract). PII policies cover the insured
include in their construction contracts the required provisions as to
against claims for breach of professional duty (professional
payment and/or adjudication, the statutory Scheme for Construction negligence). They are usually required to be in place from
Contracts SI 1998 No. 649 (the “Scheme”) applies, which will commencement of the work/services until 12 years after
imply the relevant provisions into the construction contract. practical completion.
Notwithstanding the above, any contractual provisions as to
adjudication must be in writing to be effective. Otherwise, under 1.5 Are there any statutory requirements in relation
the Construction Act, the adjudication provisions of the Scheme will to construction contracts in terms of: (a) general
be implied into the construction contract. requirements; (b) labour (i.e. the legal status of those
sub-contractors); (c) tax (payment of income tax of
1.3 In your jurisdiction please identify whether there is
employees); or (d) health and safety?
a concept of what is known as a “letter of intent”, in
non-legally binding indication of willingness either to (i) General requirements
enter into a contract later or to commit itself to meet The main statutory requirements originate from the
certain costs to be incurred by the contractor whether Construction Act, which gives parties to construction
or not a full contract is ever concluded. contracts a number of statutory entitlements, dealt with
elsewhere in this guide.
Yes, in England the Letter of Intent (“LOI”) is recognised by the (ii) Labour (i.e. the legal status of those working on site as
courts as a contracting device that may amount to either a legally employees or self-employed sub-contractors)
binding contract or a non-binding arrangement, depending on In terms of labour, individuals are legally protected from
whether the LOI contains the legally essential qualities for contract direct and indirect age, sex, disability and race discrimination
formation described in question 1.2. in the workplace under the Equality Act 2010. There are also
If used, the LOI usually forms the first part of a two-stage contracting generic obligations on employers to ensure that employees’
framework. The LOI is seen as an interim measure outlining personal details are protected.

Ashurst England
(iii) Tax (i.e. payment of income tax of employees)

With regard to tax, the Construction Industry Scheme (“CIS”)
bonds (provided by banks and others) to guarantee
is a tax deduction scheme which applies to payments made
by a contractor to a sub-contractor. Contractors deduct
money from a sub-contractor’s payments and pass it directly
to HM Revenue and Customs. The deductions count as
and guarantees?
advance payments towards the sub-contractor’s tax and
England
National Insurance. The term “contractor” under the CIS

includes construction companies and building firms but may Performance bonds and company guarantees are common tools in
also be government departments, local authorities and other England for securing the contractor’s performance and providing
businesses who procure construction work (i.e., employers the employer with redress where the contractor fails to perform its
paying a main contractor). There are various obligations obligations.
(including as to registration, verification and submitting online
returns) on both payers and payees in the construction industry. Performance bonds
Understanding the CIS and complying with its requirements The two types of performance bond most frequently encountered
is essential for those involved in construction projects as the are:
consequences of non-compliance can be severe.
■ conditional performance bonds: where the bondsman
(iv) Health and safety only becomes liable to the employer on proof of breach of
Health and safety is covered by the Construction (Design the underlying contract, or on proof of both breach and loss
and Management) Regulations 2015 (“CDM”) which places resulting from the breach; and
formal obligations upon all clients, contractors and designers ■ unconditional or on-demand performance bonds: where
(known as duty-holders) in an effort to reduce deaths and the bondsman is liable to the employer when the demand is
injuries on construction sites. The CDM Regulations put made in accordance with the bond, without the need for proof
emphasis on safety throughout the lifetime of a building, from of breach or loss resulting from the breach. This is subject
inception through to demolition, with a focus on effective to the very limited exceptions of fraud in the request for
implementation by placing obligations on duty-holders that payment, and where the underlying contract contains a clear
focus on the removal of risk rather than the incorporation and prohibition on making demands in certain circumstances and
management of risk thereafter.
a demand is made in such circumstances.
Company guarantees
1.6 Is the employer legally permitted to retain part of
the purchase price for the works as a retention to be Under a company guarantee, a parent or other group company of the
released either in whole or in part when: (a) the works contractor guarantees the performance of the contractor under the
are substantially complete; and/or (b) any agreed construction contract.
defects liability is complete? The company guarantee is usually in the nature of a “see to it”
guarantee, whereby the guarantor guarantees to the employer the
Retaining part of the purchase price from payments due to the punctual performance by the contractor of the primary obligation.
contractor is a common practice. The retention will usually be Breach by the contractor of the primary obligation automatically
a deduction from periodic payments to the contractor (often by puts the guarantor in breach and triggers a claim for damages.
withholding a percentage of each payment to the contractor until
There is no liability under a guarantee unless and until the contractor
the required amount, typically 3–5% of the contract price, has been
fails to perform the primary obligation; it is therefore a secondary
retained). It is relatively standard for half of the retained amount to
obligation. If the contractor’s primary obligation under the
be released at practical completion and the remainder at the expiry
construction contract is discharged or becomes void, the guarantee
of the defects liability period or issue of the final certificate under
falls away.
the contract.
Retention provisions may make the employer a trustee and the This highlights an important distinction in the nature of a company
contractor a beneficiary of a trust for the retained amounts, as is guarantee and an on-demand performance bond: the employer under
the case in the JCT standard forms. Contractors concerned with such a bond must be paid on presentation of the demand even if
preserving their rights to these sums may apply to the courts for there is a genuine dispute between the parties to the construction
a mandatory injunction to set aside retained amounts in a separate contract as to whether the sum in question is due. Under a guarantee,
bank account, thereby protecting their entitlement to the retained the guarantor is only liable to pay if there has been a breach of the
amounts in the case of employer insolvency. underlying contract and payment is actually due; the defences which
are available to a traditional guarantor under the company guarantee
The Construction Act requires “construction contracts” (as defined
are not available to the guarantor under an on-demand performance
under the Construction Act) to provide an adequate mechanism
bond.
for determining when payments become due and a final date for
payment. Hence, in terms of retained amounts, a construction
contract must provide a mechanism for ascertaining the date for 1.8 Is it possible and/or usual for contractors to have
repayment under that contract and must not make the release of retention of title rights in relation to goods and
retentions under a sub-contract conditional upon the performance supplies used in the works? Is it permissible for
of obligations under a separate contract (such as the release of contractors to claim that until they have been paid
retentions under a head contract).
materials supplied from the site?
The issue of retention is a topical one at present in the UK.
Perceived problems with the practice – for example, the economic In the absence of any express contractual terms to the contrary, the
impact on contractors because of monies removed from cash flow, general common law position between a contractor and employer
or lost altogether in the event of client insolvency – prompted a
is that property in materials on the site will pass to the employer
government review. The Department for Business, Energy and
when they are incorporated or affixed to the works, whether or not
Industrial Strategy is currently looking at the costs, benefits and
they have been paid for; until they are incorporated/affixed into
impacts for the construction sector and construction sector clients.

Ashurst England
the works, property remains with the contractor, even if they have Some of the commonly used standard form construction contracts
been delivered to the site (Elwes v Maw (1802) 3 East 38). The include a mechanism for enabling an engineer, architect or project
contractor is not permitted to reclaim or remove the materials once manager to suspend work under the contract on behalf of the
the materials have been affixed to the property, even where the employer. For example, the FIDIC Red and Yellow Books enable
employer or a third party has subsequently severed them from the the engineer to instruct the contractor to suspend progress of part or
property (Lyde v Russell (1830) 1 B & Ad 394). all of the works (with a resulting entitlement for the contractor to
Employers also often include transfer of title clauses in their claim for such suspension under the contract to the extent that the
England
contracts, stating that title in materials, and possibly also plant and cause of the suspension is not the responsibility of the contractor).
equipment, has, or is deemed to have, passed to them notwithstanding Similarly, the NEC4 ECC enables the project manager to instruct the
the common law position. Clauses providing for title in goods and contractor to stop or not to start any work under the contract.
materials to pass to the employer prior to their incorporation into English courts recognise a duty on the engineer/architect to act
the works are more commonplace than retention of title rights in fairly, independently and honestly in the administration of the
favour of contractors, which permit contractors to claim that until contract. This extends to duties that require the engineer/architect
they have been paid they retain title, and the right to remove goods to use its professional skill and judgment to form a view or make a
and materials supplied from the site. decision where it holds the interests of the employer and contractor
In the JCT forms of contract, title to materials on site which are not in balance.
yet incorporated into the works passes to the employer on payment, The standard forms usually deal with this by making a distinction
whilst the NEC4 form provides that title passes when the goods between when the engineer/architect is acting as agent for, and in the
arrive on site (or, in the case of off-site materials, are marked for the interest of, the employer and when the engineer/architect is required
works), so that the employer can assert whatever title the contractor to make a determination under the contract.
has to the materials once brought within the site. Under the new FIDIC Red and Yellow Books, the engineer is
However, the courts have held that clauses which state that property deemed to act for the employer in exercising the duties assigned
in unfixed materials will pass to the employer once their value has to it under the contract, except in circumstances where the contract
been included in an interim certificate for which a contractor has expressly recognises the need for a determination by the engineer.
received payment, were not sufficient to transfer to the employer In such circumstances, the engineer is “to act neutrally between the
property in a sub-contractor’s materials when the property in them parties” when agreeing or determining any matter that has been
had not passed from the sub-contractor to the contractor (Dawber referred to him.
Williamson v Humberside CC (1979) 14 BLR 70). The circumstances in which the engineer must act neutrally and make
a “fair determination” include where the engineer is determining the
employer’s entitlement to payment from the contractor, determining
the contractor’s entitlement to extensions of time, and making
valuations and adjustments to the contract price (these are typically
2.1 Is it common for construction contracts to be the determinations that trigger the impartiality requirements under
supervised on behalf of the employer by a third commonly used construction standard forms in England).
party? Does any such third party (e.g. an engineer
contractor and employer? Is that duty absolute or is 2.2 Are employers entitled to provide in the contract that
it only one which exists in certain situations? If so, they will pay the contractor when they, the employer,
please identify when the architect/engineer must act have themselves been paid; i.e. can the employer
impartially. include in the contract what is known as a “pay when
paid” clause?
It is common for construction contracts to be administered by an
architect or contract administrator under traditional procurement Under the Construction Act, a provision making payment under a
and for an employer’s agent to undertake a similar role for design construction contract conditional on the payer receiving payment
and build contracts. from a third person is ineffective, unless that third person, or any
other person, payment by whom is under the contract (directly or
A duty is usually implied on the part of the professional consultant
indirectly) a condition of payment by that third person, is insolvent
responsible for issuing certificates in accordance with a building
(as defined by the Construction Act). Where the relevant provision
contract to act impartially between the employer and the building
is ineffective, in default of the parties’ agreement of other terms of
contractor. For example, it has been implied on architects (see
payment, the payment provisions of the Scheme will apply.
Sutcliffe v Thackrah (1974) AC 727) and in relation to other forms
of contract and consultants (for example, on a project manager under
an NEC contract in Costain Ltd v Bechtel Ltd (2005) EWHC 1018 2.3 Are the parties permitted to agree in advance a fixed
(TCC)). The precise role and duties of the decision-maker will be sum (known as liquidated damages) which will be
determined by the terms of the contract under which he is required
particular breaches, e.g. liquidated damages for late
to act: Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd completion? If such arrangements are permitted, are
(2006) EWHC 89 (TCC). The consultant may be required to act there any restrictions on what can be agreed? E.g.
in relation to a number of matters where its professional opinion is does the sum to be paid have to be a genuine pre-
required, including, for example, payment to the building contractor, estimate of loss, or can the contractor be bound to
as well as certification of the works. The duty to act impartially pay a sum which is wholly unrelated to the amount of
does not inhibit the consultant’s duty to act with reasonable skill and financial loss suffered?
care. Often professional appointments contain an express duty of
impartiality, as do other documents relating to the project where the Yes, liquidated damages clauses (“LD clauses”) are a commonly
issuing of a certificate triggers an event further up the contractual used risk allocation tool in construction contracts in England. They
chain. are recognised as an effective method of avoiding the uncertainty

Ashurst England
and expense of proving the nature and extent of damage suffered variation (particularly omissions of a major part of the works – see
as a result of a breach by the contractor (often of a time-related the comments below in relation to omitting work). The contractor
obligation, such as late completion). does not usually have a contractual entitlement to an extension of
The considerable advantages of LD clauses will be lost if the clause time or additional payment if a variation is necessary due to the
is not legally enforceable. Ultimately, such a provision can be either contractor’s default.
a legitimate LD clause, in which case it will be enforceable, or a
penalty, in which case, as a matter of public policy, it will not.
England

The principles adopted by English courts in determining if an LD omitted, can the employer do it himself or get a third
clause amounts to a penalty were recently restated in Cavendish party to do it?
Square Holding BV v Makdessi (2015) UKSC 67. Following
this Supreme Court decision, the test for determining whether It is usual in England for the variation provisions to give the
a clause is a penalty will be whether it imposes on the contract- employer a right to order part of the work to be omitted (with a
breaker consequences which are “out of all proportion to any mechanism for a consequent adjustment to the contract price).
legitimate interest of the innocent party”. Therefore, the fact that The position at common law is that, absent express words to the
a clause does not contain a genuine pre-estimate of loss does not contrary in the construction contract, the employer may:
automatically mean it is a penalty. As long as a legitimate business ■ only omit work which it is intended should not be carried
interest is served and protected by the clause and the provision is out at all (see, for example, Carr v Berriman (JA) Pty Ltd
not “extravagant, exorbitant or unconscionable”, it will be upheld. (1953) 27 A.L.J. 273 (Aus), as applied in Amec Building Ltd
v Cadmus Investment Co Ltd (1996) 51 Con L.R. 105);
■ not, and the architect/engineer may not, omit part of the work
3 Common Issues on Construction from the contract and have it or similar work done by another
Contracts contractor, or do the omitted work itself; and
■ not by virtue of the omission allow the removal of all of the
work from the contractor’s scope: see Abbey Developments
Ltd v PP Brickwork Ltd (2003) CILL 2033 as considered
and applied in Trustees of Stratfield Saye Estate v AHL
Construction (2004) EWHC 3286 (TCC). The employer may
At common law, subject to the inclusion of express provisions not change the fundamental nature of the work by an omission.
(see below), the employer is not generally entitled to vary or alter
previously described work and materials as of right without the
contractor’s agreement. The general rule is that, if a contractor has
been requested to carry out work that is a variation to the contract, he
will be entitled to recover payment for it if the employer has expressly
Terms may be implied by statute, by certain types of conduct, or by
or impliedly requested the work knowing it to be a variation.
operation of a principle of common law to certain types of contract.
A consultant appointed by the employer has no implied authority
Under the Construction Act, there are a number of terms which will
to order additional work or promise to pay for it. In the absence
be implied into a construction contract where the contract does not
of express provisions, in order to recover payment for additional or
comply with certain requirements of the Construction Act. These
varied work, a contractor would need to show that it had a separate
include:
contract with the employer that it should carry out the additional or
varied work which it had done on the consultant’s instructions and ■ Section 108 – Right to refer disputes to adjudication.
be paid for it. ■ Section 109 – Entitlement to stage payments.
As a result, express provisions as to variation of work are a common ■ Section 110 – Dates for payment.
feature of construction contracts. Variations are often instructed by ■ Section 111 – Requirement to pay notified sum.
the employer’s contract administrator, with the extent of authority ■ Section 113 – Prohibition of conditional payment provisions.
to order additional works depending on the terms of the contract
administrator’s appointment.
If the additional or varied work is so peculiar, unexpected and fault of the contractor and one the fault or risk of
different from what any person reckoned or calculated upon, it may his employer, is the contractor entitled to: (a) an
not fall within the contract at all and the contractor will be entitled extension of time; or (b) the costs occasioned by that
to payment for the varied work on a quantum meruit basis: Thorn v concurrent delay?
London Corp (1876) 1 App. Cas. 120.
Contractual provisions that allow an employer to vary work (for (a) The English courts in recent years have followed the approach
of Mr. Justice Dyson in Henry Boot Construction (UK) Ltd
example, by omitting work) often do not allow the contractor to be
v Malmaison Hotel (Manchester) Ltd (1999) 70 ConLR 32,
deprived of its opportunity to carry out the work and, usually where QBD (TCC). The effect of that approach has been that, if
the employer engages another contractor to carry out work that the contract is silent as to the contractor’s entitlement to an
would otherwise have been carried out by the original contractor, extension of time where there is concurrency between any
this will constitute a breach of contract. employer-risk event and a contractor-risk event, both of
Typically, the contractor will be entitled to claim an extension which impact upon the programme for the Works (i.e. cause
of time, and/or its loss and expense if a variation is instructed by the delay), the contractor is entitled to an extension of time
for the entire period.
the employer (subject to the contractor being able to show that
the employer has agreed to pay for the work in question and that (b) In terms of a contractor’s entitlement to costs caused by a
the work is outside the scope of work agreed to be carried out for concurrent delay, it is unlikely that the same approach will
apply to claims of loss and expense, unless the wording of
the contract sum). Contractors may try to restrict the extent of a
the contract expressly permits it. There seems to be a much

Ashurst England
higher test of causation applied to a contractor’s costs in The JCT standard forms (other than the Major Project Construction
comparison to extensions of time (and in this respect he may Contract) are silent on the issue, thereby adopting the common
fail the “but for” test of causation). law position of the contractor bearing the risk of encountering
Where the parties have made adequate contractual provision for the unforeseen ground conditions. The FIDIC Silver Book takes this
allocation of the risks associated with concurrent delay, the courts a step further and expressly allocates all such risk to the contractor.
will uphold that provision (North Midland Building Limited v Cyden The NEC4 ECC is, in comparison, relatively favourable to the
Homes Limited (2017) EWHC 2414 (TCC)). contractor, allowing recovery where the contractor encounters
England
“physical conditions” within the site which are not weather
3.5 If the contractor has allowed in his programme a conditions, which “an experienced contractor would have judged
period of time (known as the float) to allow for his own at the contract date to have such a small chance of occurring that it
delays but the employer uses up that period by, for would have been unreasonable to have allowed for them”.
after this float is used up? 3.8 Who usually bears the risk of a change in law
The question of “ownership” of float is a matter of debate under
English law, particularly where delays occur which cause a If the contract is silent on the issue, the contractor bears the risk of
programmed float to be absorbed in whole or in part without changes in law impacting the work under the contract.
necessarily causing any delays to the works or to the following The standard form construction contracts will often address this
activities. The issue has been considered at length by commentators issue expressly. The FIDIC Red, Yellow and Silver Books pass both
and authors without any clear consensus emerging. the time and cost risk to the employer, allowing an extension of
The judgment of Mr. Justice Lloyd in Royal Brompton Hospital time and an adjustment to the contract price to take into account
National Service Trust v Hammond & Ors (No.9) (2002) the impact of any change in law in the country in which the site is
EWHC 2037 (TCC) does provide authority for the courts giving located. The base date used for determining this adjustment is 28
consideration, in respect of JCT contracts, to what would be fair and days prior to the submission of the tender for the work. The FIDIC
reasonable in the circumstances and determining that the contractor change in law provisions do, however, enable the passing on of cost
should not be deprived of the float where the employer’s delay savings to the employer to the extent that a change in law results in
occurs prior to the contractor’s. However, the preferred view and a cost saving to the contractor.
better argument under English law is that the float time necessarily The NEC4 optional change in law clause passes the time and cost
belongs to the project and therefore that whichever party comes to risk of a change in law to the employer, to the extent such changes
utilise the float first should have the benefit of it. This is particularly impact the contractor’s costs and ability to complete the works on
the case where the programme is not a contract document. The time. Like the FIDIC provision, the NEC4 change in law clause is
contractor’s obligation is to carry out and complete the work by the reciprocal, allowing the employer to benefit from a change in law
completion date, rather than by any specific activity date. which reduces the contractor’s costs under the construction contract.
The position in respect of risk allocation for changes in law under
3.6 Is there a limit in time beyond which the parties to the main JCT forms of contract is that the contractor can claim
a construction contract may no longer bring claims an extension of time to the extent that it notifies the employer of
against each other? How long is that period and from the delay resulting from the change in law together with sufficient
supporting information. The risk of delay is therefore passed to the
employer, while the risk of additional cost arising from the change
Limitation periods are imposed by the Limitation Act 1980. The in law remains with the contractor.
limitation period for a normal contractual claim is six years from
accrual of the cause of action (the date of breach of contract), but if
the contract was created by deed, the limitation period is 12 years 3.9 Who usually owns the intellectual property in relation
from the breach of contract. to the design and operation of the property?
The authors of the copyright material created in respect of the

design and operation of a property are typically the employer’s
conditions?
design consultants, or where a contractor has carried out design,
the contractor or a combination of these. Such consultants and/
The position under the common law is that if the contract is silent on
or contractors will typically own the intellectual property rights in
the issue, the contractor bears the risk of encountering unforeseen
relation to the project.
ground conditions in carrying out the work under the contract.
Owners or authors of copyright material are rarely willing to
Although much will depend on the risk profile of the construction
assign ownership of the material on UK construction projects, so
arrangement between the parties, the common compromise is
employers generally seek to ensure that they are granted royalty-
reflected in a number of the standard forms. This approach varies the
free, irrevocable licences to use and reproduce all copyright in
position at common law so that risk lies with the contractor unless
any drawings and other documents produced by any consultants
a physical condition is encountered on site, which at the date of
or contractors, together with the right to transfer the licence and
tender could not reasonably have been foreseen by an experienced
grant sub-licences in appropriate circumstances (i.e. in favour of
contractor possessing all the information he had/could have obtained
purchasers, tenants, funders and any other third parties with an
by visual inspection of the site or by reasonable enquiry. This type
interest in the project who may need to use the copyright material
of wording is used in the IChemE Red Book (lump sum contract)
relating to the design and/or operation of the project).
and is also an apt summary of the position adopted by the FIDIC
Red Book and Yellow Book and the JCT Major Project Construction
Contract.

Ashurst England
obligations and potentially terminate if the force majeure event

3.10 Is the contractor ever entitled to suspend works? continues for a certain amount of time. Given that the remedy is
severe, such clauses are often the subject of heavy negotiation,
The Construction Act provides for a right to suspend performance and the fact that a contract has become uneconomic will not be
for non-payment so that: a ground for a claim for force majeure. In Thames Valley Power
■ the contractor may either suspend performance of all of its Limited v Total Gas & Power Ltd (2005) EWHC 2208, the court
work/obligations or just some; drew a distinction between inability and inconvenience, and held
England
■ the defaulting payer is liable to pay the contractor a reasonable that inconvenience was not enough for a force majeure clause to
amount in respect of costs and expenses reasonably incurred succeed.
by the contractor as a result of exercising his right to suspend;
The concept of frustration exists in English law as an exception to
and
the general rule that if performance of a contract becomes more
■ the contractor will be entitled to an extension of time for the
difficult or even impossible, the party that fails to perform is liable in
delay caused as a consequence of the suspension and not just
damages (Paradine v Jane (1647) Aleyn 26). “Frustration” allows
for the period during which he suspends performance.
the contract to be automatically discharged when a frustrating event
The contractor’s right to suspend work for non-payment is sometimes occurs.
expressly included in UK construction contracts, although the right
will in most cases be implied into the construction contract by the A frustrating event is one which:
Construction Act. ■ occurs after contract formation;
■ is so fundamental as to be regarded by the law both as striking
at the root of the contract and as entirely beyond what was
contemplated by the parties when they entered the contract;
entitle the innocent party to terminate the contract? ■ is not due to the fault of either party; and
Do those termination rights need to be set out ■ renders further performance impossible, illegal or makes it
expressly? radically different from that contemplated by the parties at
the time of the contract.
A party may have express termination rights under a construction
contract, and/or it may have termination rights at law. It will
generally be preferable to terminate using an express contractual entitled to claim the benefit of any contract right
termination right, and rights to terminate at law are generally more which is made for their benefit? E.g. is the second or
restrictive than their contractual counterparts. subsequent owner of a building able to claim against
A party will often have contractual rights of termination detailed in the original contracts in relation to defects in the
the construction contract, which it can exercise on the occurrence building?
of certain events (e.g. bankruptcy or insolvency of the other party).
The JCT Standard Building Contract 2016, for example, gives the Third parties taking an interest in a new development cannot now
employer termination rights on the occurrence of certain events of rely with any degree of certainty on having a remedy in tort in the
default by the contractor (such as suspending the carrying out of the event that a defect is discovered.
works without reasonable cause), or in the event of the insolvency In order to avoid developers having to give long-term warranties
of the contractor. The contractor also has termination rights in the in respect of latent defects in a building, it has been the practice
event of certain defaults by the employer (such as failure to pay of developers to impose on their contractors and consultants an
by the final date the amount properly due), or in the event of the obligation to provide interested third parties with contractual
employer’s insolvency. Both parties have rights of termination warranties in respect of the work that they have carried out, thus
for force majeure. Similarly, the FIDIC Red and Yellow Books creating privity of contract between the various interested parties
contain express provisions dealing, for example, with termination and those responsible for design and construction. Such warranties
by the employer. They set out the circumstances that may lead to run in parallel to, or are stated to be, “collateral” to the main contract
a termination, either as a result of a default by the contractor or for or appointment. The form which these contractual or collateral
convenience (i.e. without default by the contractor), and describe warranties can take varies considerably, some amounting to little
the procedures that must be followed and the financial arrangements more than a one-page letter creating a duty of care in favour of end
that will apply when this occurs. users, and others being significantly more complex, dealing with
If it does not have express contractual termination rights, or the matters beyond simply the contractor’s or consultant’s duty of care
express contractual termination rights do not apply, then a party may to the beneficiary.
have grounds to terminate a contract at law for repudiatory breach
However, developers, contractors, consultants, funders, purchasers
of contract (which occurs where a party fails to perform a condition
and tenants are now sometimes dispensing with the use of deeds of
of the contract or where a party refuses outright to perform all or
collateral warranty, as in their place, equivalent protection can be
substantially all of its obligations under a contract).
created through the use of the rights created by the Contracts (Rights
of Third Parties) Act 1999 (the “C(ROTP) Act”).
3.12 Is the concept of force majeure or frustration known The C(ROTP) Act reformed the doctrine of privity of contract.
in your jurisdiction? What remedy does this give
Historically, under English law, a contract could not confer rights
successfully that a contract which has become or impose obligations on anyone other than the signatories to the
uneconomic is grounds for a claim for force majeure? contract, irrespective of any contrary intention of the parties. The
C(ROTP) Act sets out various circumstances in which a third
Force majeure is not an English law concept but force majeure party is entitled to enforce a contract directly against the relevant
clauses are often included in a construction contract to allow a contracting party in his own name and without having to “join” the
party who cannot perform the construction contract to suspend its other contracting party in the action.

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

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

Ashurst England
In the UK, however, an express fitness for purpose warranty ■ International Chamber of Commerce (“ICC”).
as to design and/or the completed works can be difficult to ■ Chartered Institute of Arbitrators.
obtain (primarily because it is commonly resisted by insurers), ■ London Court of International Arbitration (“LCIA”).
and warranties as to the fitness of any designs for their intended
■ International Centre for Dispute Resolution.
purposes are expressly carved out of the JCT forms of contract.
Instead, employers tend to incorporate into construction contracts Many of the standard form construction contracts, such as the JCT,
the implied terms of satisfactory quality and fitness for purpose of provide for litigation as the default dispute resolution mechanism for
England
goods and materials to provide an absolute warranty in relation to disputes. This, together with the increased popularity of litigation
fitness for purpose of the various components of a building. in the Technology and Construction Court (a specialist division
of the new Business and Property Courts), has led to a decline in
Where there are specific performance requirements, the achievement
the appeal of arbitration for certain types of construction dispute.
of which is commercially important to the employer, an express
However, arbitration continues to be the preferred choice for large
warranty that the works will meet these requirements so as to be fit
international projects.
for a specified purpose is also sometimes sought by employers (see,
for example, the recent case of MT Højgaard A/S v E.On Climate
& Renewables UK Robin Rigg East Limited and another (2017) 4.4 Where the contract provides for international
UKSC 59). arbitration, do your jurisdiction’s courts recognise
and enforce international arbitration awards? Please
advise of any obstacles to enforcement.
The UK is a signatory to the New York Convention (the
“Convention”) and has incorporated it into its legislation in
4.1 How are disputes generally resolved? sections 100–104 of the Arbitration Act 1996. The UK courts will
recognise and enforce foreign awards made in the territories of the
The most common methods of settling construction disputes are other signatory states. Foreign arbitral awards will be enforced in
adjudication, litigation and arbitration. the same way as a judgment or order of the national courts. Post-
Brexit it is possible that arbitration may become a more attractive
4.2 Do you have adjudication processes in your alternative to litigation in the English courts because it avoids
jurisdiction? If so, please describe the general uncertainty concerning enforcement (see question 4.5 below).
procedures. The courts will refuse to enforce an award in limited circumstances,
such as those set out in Article V of the Convention. These include
Adjudication is a popular process for resolving disputes in the UK. instances in which:
It was introduced in order to resolve disputes more quickly for the ■ a party to the arbitration agreement was under some
benefit of contractors and sub-contractors through the Construction incapacity;
Act. ■ the arbitration agreement was not valid under its substantive
Parties to a “construction contract” can, subject to a few exceptions, law;
refer any dispute to adjudication at any time. ■ a party against whom it is to be enforced was not given proper
The adjudication process is significantly shorter than arbitration or notice or was unable to present its case;
litigation. Following receipt of the referral to adjudication from ■ the tribunal lacked jurisdiction;
the referring party, the responding party typically only has between ■ there was a procedural irregularity; and/or
seven and 14 days to respond, and the adjudicator will typically ■ it would be contrary to public policy to recognise or enforce
provide his decision within 28 days of receiving that referral (unless the award.
the parties agree otherwise).
The decision of the adjudicator is binding until the dispute is finally
determined by arbitration, litigation or subsequent agreement. A in a foreign country, will the judgment of that foreign
successful party can apply to the court to enforce an adjudicator’s court be upheld and enforced in your jurisdiction?
decision if the other party does not comply. The grounds for
disputing the validity of an adjudicator’s decision are extremely It is the origin of the foreign judgment which determines whether
limited. that judgment will be enforceable in England and Wales.
For example:
4.3 Do your construction contracts commonly have ■ Judgments from EU Member States are governed by the Recast
arbitration clauses? If so, please explain how Brussels Regulation on jurisdiction and the recognition and
enforcement of judgments in civil and commercial matters
(Regulation (EU) 1215/2012), and the EEO Regulation
Arbitration is a private dispute resolution method which, in the UK, creating a European Enforcement Order for uncontested
is governed by the Arbitration Act 1996. Any arbitrator’s award is claims (which does not apply to Denmark) (Regulation (EC)
binding on the parties and is enforceable in the courts. 805/2004). For proceedings begun before 10 January 2015,
the original Brussels Regulation (Regulation (EC) 44/2001)
Unlike adjudication and litigation, the parties must agree to
continues to apply. At the time of writing, the implications of
refer disputes between themselves to arbitration. The arbitration Brexit on the enforcement of judgments remains uncertain.
agreement may be a separate agreement or, more commonly, a Because of its reciprocal nature, the Brussels regime cannot
clause within the construction contract. simply be retained by importing it wholesale into UK law.
Parties can choose the particular rules for their own arbitration, While the UK Government has stated its commitment to
or they can choose for it to be governed by one of a number of replicating existing provisions as closely as possible, this
organisations, such as the: would be of limited effect as, while the English courts would

Ashurst England
continue as they do now, the courts of other European states ■ The value of the claim is more than £250,000.
would no longer be bound to respect and uphold English ■ It has an international element.
jurisdiction and judgments. A bilateral treaty with the EU
■ It is complex.
copying the provisions of the Recast Brussels Regulation
would be necessary to retain the equivalent of the current ■ It involves novel points of law.
arrangement. Certainty in terms of enforcement will only be ■ It involves adjudications, including enforcements, and
achieved once it is known what any negotiated exit deal looks arbitrations.
like.
England
Claims for less than £250,000 should generally be commenced in

■ Judgments from Iceland, Norway and Switzerland are County Courts or High Courts outside of London, where there is a
governed by the Lugano Convention on jurisdiction and
designated TCC judge available unless the claim satisfies one of the
the recognition and enforcement of judgments in civil and
other criteria above. Another exception to this general rule relates
commercial matters (L339/3) (the “Lugano Convention”).
to public procurement cases, which should normally be issued in
■ Judgments from most Commonwealth countries are
the High Court in London because of the expertise of the judges in
governed by either the Administration of Justice Act 1920,
the TCC there.
the Civil Jurisdiction and Judgments Act 1982, or the
Foreign Judgments (Reciprocal Enforcement) Act 1933. If proceedings are brought in the TCC, the procedure is similar to
■ For countries that do not have applicable treaties in place the procedure in the other UK courts, viz. the claimant serves a claim
with the UK, or in the absence of any applicable UK statute, form supported by particulars of claim and the defendant serves a
the foreign judgment may be enforced under the common defence together with any counterclaim, either within 14 days of
law. service of the particulars of claim, or within 28 days of service
should the defendant first serve an acknowledgment of service of
the particulars of claim. There then follows a case management
your jurisdiction, please outline the process adopted, conference directed by the judge, disclosure by both parties of
any rights of appeal and a general assessment of documents both in support of, and to the detriment of, their claim,
how long proceedings are likely to take to reduce: (a) and a hearing. The judge then gives a judgment and both parties
a decision by the court of first jurisdiction; and (b) a have the opportunity to request permission to appeal that judgment.
decision by the final court of appeal. The whole process can take many months or even years, depending
on the complexity of the case and whether the case goes to appeal.
Litigation in relation to construction is usually dealt with at first It is likely to be a considerably longer process than adjudication, but
instance by the Technology and Construction Court (“TCC”), in may be similar in length to arbitration.
which there are several full-time specialist judges in London, and
full- and part-time TCC judges sitting in various regional TCC
centres across the country. Acknowledgment
The guidelines as to when a claim should be issued in the TCC The authors would like to thank Matthew Bool and Ben Patton for
in London are set out in The Technology and Construction Court their invaluable contributions to this chapter. Matthew and Ben are
Guide (Second Edition) published by the government and in West partners in the Construction department of Ashurst’s London office
Country Renovations Ltd v McDowell and another (2013) 1 WLR (Email: matthew.bool@ashurst.com; ben.patton@ashurst.com).
416, and include:

Ashurst England
Tim Reid Michael J. Smith

Ashurst Ashurst
Broadwalk House Broadwalk House
5 Appold Street 5 Appold Street
London EC2A 2HA London EC2A 2HA
England
Tel: +44 207 859 1548 Tel: +44 207 859 1004
Fax: +44 208 638 1112 Fax: +44 208 638 1112
Email: tim.reid@ashurst.com Email: michael.j.smith@ashurst.com
URL: www.ashurst.com URL: www.ashurst.com
Tim Reid is a partner in London and specialises in the resolution of Michael J. Smith is a partner in the construction group in London. He
disputes in the energy and construction and civil engineering sectors specialises in the construction aspects of major infrastructure projects,
both in the UK and internationally. His current and recent cases cover domestic and international EPC contracting and all other areas of non-
a broad spectrum and include disputes arising from multi-million contentious construction and engineering law. His particular focus
pound PFI projects in the UK and exploration for oil and gas reserves is the renewable energy sector, including energy from waste plants,
off the coast of Africa. solar energy and on and offshore wind farm development. He has
extensive experience in the drafting and negotiation of PFI/PPP project
Tim has experience of all forms of dispute resolution. In addition
documentation and bespoke EPC, DBFO and BOT documentation.
to the successful conduct of High Court proceedings, Tim also has
Michael also has expertise in all major UK and international standard
considerable experience of the successful conduct of adjudications,
form construction and engineering contracts (and associated interface
arbitrations (national and international) and a large number of
and security support instruments).
mediations. As well as being a solicitor in England and Wales, Tim is
admitted as a solicitor in Hong Kong. Michael is ranked in the Chambers UK Guide for Construction.
Tim is recommended as a Leading Individual in The Legal 500 and
ranked in the Chambers UK Guide for Construction.
Ashurst is a leading international law firm advising corporates, financial institutions and governments. With 25 offices in 15 countries, Ashurst offers
a worldwide reach and the international insight of a global network, combined with local market knowledge. Our non-contentious construction group
advises all parties involved in UK and international real estate transactions and clients, project sponsors and lenders involved in UK and international
energy, infrastructure and transport projects. Our core disputes practice areas include general commercial disputes, construction and engineering
disputes, energy, resources and infrastructure disputes, financial and regulatory disputes, real estate disputes and international arbitration.

Chapter 9
Finland Aimo Halonen
Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law Juho Lönnblad
place both design and construction obligations construction contract (e.g. provision for adjudication
upon contractors? If so, please describe the types of or any need for the contract to be evidenced in
contract. Please also describe any forms of design- writing)?
contracting, with one main managing contractor Under the Contracts Act (228/1929), which sets down the basic
and with the construction work done by a series principles of Finnish contract law, a contract is concluded when an
of package contractors? (NB For ease of reference offer to conclude a contract is accepted. Construction agreements
throughout the chapter, we refer to “construction usually, and public procurement agreements always, come into
contracts” as an abbreviation for construction and force upon signature. The widespread application of the YSE
engineering contracts.)
1998 General terms for building contracts (YSE 1998 conditions)
significantly diminishes the need for contractors to separately agree
The standard construction contracts commonly used in Finland are on contractual terms.
turnkey construction contracts, overall construction contracts and
divided construction contracts. Lately, integrated project delivery
and project alliance have grown increasingly popular in major 1.3 In your jurisdiction please identify whether there is
infrastructure projects, and the first standardised model contracts for
project alliances were introduced in 2018. In a turnkey construction non-legally binding indication of willingness either to
contract, a developer enters into an agreement with a contractor, enter into a contract later or to commit itself to meet
who takes full responsibility for both the design and construction certain costs to be incurred by the contractor whether
work of a specific property. or not a full contract is ever concluded.
In an overall construction contract, a developer enters into an
agreement with a single contractor. This contractor can, however, Pre-contractual agreements used in Finland can typically be divided
utilise one or several subcontractors to fulfil its contractual obligations. into binding pre-agreements and non-binding letters of intent.
Design work is commonly excluded from such construction contracts. Despite this general rule, the binding nature of such instruments is
always determined on a case-by-case basis depending on the terms
In a divided construction contract, a developer enters into
therein. Pre-agreements of any form are not very common between
agreements with one main contractor and several subcontractors,
employers and employees.
who may further subcontract their works. Design work is usually
carried out by an external party.
A contract can also be set up with a so-called “management 1.4 Are there any statutory or standard types of insurance
which it would be commonplace or compulsory to
contract”, in which the main contractor is replaced by a project
management organisation. Such projects are commonly split into For example, is there employer’s liability insurance
several separate contracts and projects. for contractors in respect of death and personal
In integrated project delivery and project alliance contracts, decision- injury, or is there a requirement for the contractor to
making power in the project is largely transferred from the client to have contractors’ all-risk insurance?
an ad hoc project management organisation, comprising participants
from all participating (alliance) parties. An essential part of the Employers carrying out construction work are responsible for
contract is an incentive mechanism, intended to give rewards or acquiring statutory insurances, namely earnings-related pension,
sanctions to all parties, depending on whether the project goals are health insurance pension, unemployment insurance and accident
met. The main legal challenges in current contract models are found insurance.
in unclear or imbalanced risk allocation between the parties. The YSE 1998 conditions require the main contractor to take out
In the Finnish jurisdiction, design-only agreements may be performed insurance for both the construction works and the materials and
either by one main designer, or by one or several sub-designers. supplies acquired for the works for their reacquisition value.

Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law Finland
Additional insurances are also commonly taken out, e.g.: loss-of- are integrated into the works, title to such items commonly passes to
profits insurance; liability insurance; or legal expenses insurance. the employer upon integration.
1.5 Are there any statutory requirements in relation 2 Supervising Construction Contracts
working on site as employees or as self-employed 2.1 Is it common for construction contracts to be
Finland
sub-contractors); (c) tax (payment of income tax of supervised on behalf of the employer by a third
employees); or (d) health and safety? party? Does any such third party (e.g. an engineer
When ensuring the compatibility of construction contracts with the contractor and employer? Is that duty absolute or is
Finnish statutory requirements, key considerations would include it only one which exists in certain situations? If so,
the following: please identify when the architect/engineer must act
impartially.
■ Complying with Finnish labour law and applicable collective
agreements, as well as the Act on the Contractor’s Obligations
and Liability when Works are Contracted Out (1233/2006). Construction contracts are commonly supervised by a supervisor
■ Complying with the rules applicable to foreign employees. appointed by the employer. According to the Land Use and Building
Act (132/1999), the employer is responsible for a construction
■ Complying with Finnish laws concerning land use and building.
project. Such responsibility also includes an obligation to ensure
■ Complying with Finnish laws concerning reporting that works are properly supervised. The content of supervision or
obligations to the Tax Administration.
the qualification requirements of the supervisor are not defined by
■ Observing relevant safety requirements. law. However, the construction industry organisations have signed a
The reversed value added tax (VAT) rule, whereby the buyer is treaty, where a common set of requirements is agreed for supervisors.
responsible for the payment of VAT instead of the seller and is There are no particular requirements of impartiality. The YSE
applicable to certain construction-related services, is also noteworthy. 1998 conditions include a provision whereby the supervisor must
be changed if he is incompetent or unsuitable to the extent that the
implementation of building work is suffering.
released either in whole or in part when: (a) the works 2.2 Are employers entitled to provide in the contract that
are substantially complete; and/or (b) any agreed they will pay the contractor when they, the employer,
defects liability is complete? have themselves been paid; i.e. can the employer
a) Milestone payments can be withheld until the corresponding paid” clause?
works are completed. Contracts commonly stipulate that
invoices shall not be paid before the corresponding milestone The use of a “pay when paid” clause is possible but not common, as
under the contract is completed and the invoice is otherwise
contractors tend to apply the YSE 1998 conditions and milestones
considered fit for payment.
are usually aligned with payments.
b) The YSE 1998 conditions also provide that an employer is
entitled to withhold a sum corresponding to repair work for If such clauses were to be applied, contractors should take into
a defect for which a contractor is liable until adequate repair consideration the provisions in the Act on Payment Terms in
has been effected. Commercial Agreements (30/2013) as amended by Act 385/2015.
Said act provides that payment time is presumed to be 30 days in
case a debtor is either a contracting authority or an entrepreneur.
bonds (provided by banks and others) to guarantee When a debtor is a contracting authority, the payment time of an
performance, and/or company guarantees provided to invoice may exceptionally amount to a maximum of 60 days. If a
guarantee the performance of subsidiary companies? debtor is an entrepreneur, the payment time shall exceed 30 days
Are there any restrictions on the nature of such bonds only if the parties have expressly agreed thereon.
and guarantees?

There are no particular restrictions on bonds and guarantees and a
typical security structure is one where separate performance bonds paid by the contractor to the employer in the event of
are provided for the period of construction work and the defects particular breaches, e.g. liquidated damages for late
liability period of the works. completion? If such arrangements are permitted, are
1.8 Is it possible and/or usual for contractors to have estimate of loss, or can the contractor be bound to
retention of title rights in relation to goods and pay a sum which is wholly unrelated to the amount of
supplies used in the works? Is it permissible for financial loss suffered?
contractors to claim that until they have been paid
materials supplied from the site? Liquidated damages can be freely agreed upon. There are no
limitations on the amounts of damages, but excessive damages may
Title to goods and supplies typically passes to the employer upon be deemed unfair and hence unenforceable. Contracting parties
payment for the respective items. However, if goods and supplies may also agree to follow the provisions for liquidated damages set
out in the YSE 1998 conditions.

3 Common Issues on Construction 3.6 Is there a limit in time beyond which the parties to
Contracts a construction contract may no longer bring claims
under the contract? Is there any limit on that right? According to the Act on Limitation of Debts by Lapse of Time
(728/2003), the general limitation period for debts by lapse of
Finland
Fundamentally, an employer is not able to vary the works to time is three years. However, for compensatory damages and
be performed under a contract as contracts may not be altered indemnification, a limitation period of 10 years from the breach
unilaterally. However, an employer is entitled to carry out of contract or other grounds for compensation is applied. The
modifications, which a contractor is obliged to perform, provided limitation may be avoided by making an appropriate claim, based
that such modifications do not substantially alter the content of a upon which the limitation is cut off.
contractor’s performance. If modifications go beyond what could
The parties may also agree on shorter limitation periods for
be reasonably assumed by a contractor, a contractor has the right to
commencing proceedings under a contract.
refuse to carry out such modifications. More substantial alterations
are considered amendments of the original contract.
conditions?
party to do it? Under the YSE 1998 conditions, the risk for unforeseen ground
conditions is borne by the employer. However, if the contractor
has neglected to familiarise himself with the project site, the risk of
The employer is entitled to instruct some work under the contract to
unforeseen ground conditions may to some extent be attributed to
be omitted as long as such omissions do not significantly alter the
the contractor.
nature of the construction contract. The contractor is not entitled to
unilaterally omit any work which has been contractually agreed on.
The risk of a change in law is usually borne by the employer.
If the contracting parties have used a set of terms and conditions
in their previous undertakings, such terms may be considered a 3.9 Who usually owns the intellectual property in relation
commercial custom between the parties and thus be deemed implied. to the design and operation of the property?
The status of the YSE 1998 conditions as implied terms is somewhat
ambiguous. In some cases, they have been likened to a general According to the YSE 1998 conditions, both parties retain the
commercial custom and applied to construction contracts as implied intellectual property rights to their own designs. In design-only
terms. contracts, the KSE 2013 conditions are typically applied. Under
the KSE 2013 conditions, intellectual property rights belong to the
consultant.
his employer, is the contractor entitled to: (a) an 3.10 Is the contractor ever entitled to suspend works?
concurrent delay?
Unless otherwise agreed by parties, a contractor shall not suspend
his works at a site. If the parties follow the YSE 1998 conditions,
Under the YSE 1998 conditions, a contractor is not entitled to a contractor is, instead of suspending works, entitled to claim, from
an extension of time for delays attributable to the contractor nor the employer, liquidated damages as agreed and/or additional costs
compensation of related costs; however, they are entitled to an that have arisen due to a delay.
extension of time for delays attributable to the employer and
compensation of related costs, provided that the contractor has
given adequate notification thereof to the employer. 3.11 On what grounds can a contract be terminated? Are
entitle the innocent party to terminate the contract? Do
3.5 If the contractor has allowed in his programme a those termination rights need to be set out expressly?
delays but the employer uses up that period by, for A contract can be terminated by a contractor if an employer neglects
his obligations under the contract or force majeure grounds are at
after this float is used up? hand (for a long or indefinite period).
A contract can be terminated by an employer if a contractor is in
This depends on the precise wording of the programme and the float. breach of contract, a contractor is declared bankrupt or is otherwise
As long as the deadlines set in the programme are met, extension of in a situation where he cannot be expected to fulfil his contractual
time is unlikely. obligations. In addition, a contract can be terminated due to
force majeure (for a long or indefinite period) or in the case that a
contractor dies while a construction project is ongoing.

3.12 Is the concept of force majeure or frustration known 3.16 Where the terms of a construction contract are
in your jurisdiction? What remedy does this give ambiguous, are there rules which will settle how that
the injured party? Is it usual/possible to argue ambiguity is interpreted?
Parties usually refer to the YSE 1998 conditions, which provide that
disagreements or ambiguous contract terms shall be settled through
Both a contractor and an employer are entitled to terminate a
Finland
mutual negotiations between the parties.
contract on force majeure grounds. Force majeure is at hand if it
According to the general principles of contract law, a clause shall be
is necessary to interrupt the building work for a long and indefinite
interpreted to the detriment of its author.
period on account of exceptional circumstances referred to in the
State of Defence Act (1083/1991) or the Readiness Act (1552/2011)
or similar force majeure. 3.17 Are there any terms in a construction contract which
are unenforceable?
Force majeure grounds entitle the other party to compensation for
the work which corresponds to the part of construction that has
already been performed. No, other than on the grounds set out in the Contracts Act (228/1929)
on which contracts in general may be unenforceable.
It is not possible for a contractual party to claim force majeure in a
situation where a contract has become uneconomical.
3.13 Are parties which are not parties to the contract are the designer’s obligations absolute or are there
entitled to claim the benefit of any contract right limits on the extent of his liability? In particular, does
which is made for their benefit? E.g. is the second or the designer have to give an absolute guarantee in
subsequent owner of a building able to claim against respect of his work?
building?
Typically, in design-only contracts, the designer’s liability for defects
is limited to the total amount of compensation received under the
According to the Code of Real Estate (540/1995), if the buyer has
contract (KSE 2013 conditions). Otherwise, in regular construction
acquired real estate to serve as a residence or leisure residence for
contracts, there are no set limits for the parties’ liabilities.
himself or his family, the buyer, instead of the seller, has the right
to make claims based on defects in quality against a merchant who
develops or sells real estate professionally and who has conveyed 4 Dispute Resolution
the real estate to the seller or a previous titleholder for the purpose
referred to above; or a building element dealer, developer or other
merchant who is responsible for defects to the seller or a previous 4.1 How are disputes generally resolved?
titleholder by virtue of an agreement or the Consumer Protection
Act (38/1978). Arbitration is commonly preferred over litigation in connection with
According to the Housing Transactions Act (843/1994), a housing international or larger construction contracts. According to the YSE
corporation has the right to make an appeal regarding the contents 1998 conditions, unless otherwise contractually agreed, disputes
of a contract on construction or repair, even if it is not party to said between parties are resolved in district courts.
contract. Additionally, if any equipment belonging to an apartment
is defective, the buyer of the apartment has, under the Consumer 4.2 Do you have adjudication processes in your
Protection Act (38/1978), the right to make claims against an jurisdiction? If so, please describe the general
economic operator who has surrendered the equipment for resale or procedures.
housing production at an earlier level in the sales chain.
There are no binding official adjudications processes in Finland.
However, RIL Conciliation, which operates alongside RIL – the
3.14 Can one party (P1) to a construction contract which
owes money to the other (P2) set off against the sums Finnish Association of Civil Engineers – is an organisation focused
due to P2 the sums P2 owes to P1? Are there any on solving disputes in construction projects. RIL Conciliation and
limits on the rights of set-off? the Consumer Disputes Board, a neutral and independent expert
conciliation body for all consumer issues, provides recommendations
Set-off can be either a voluntary or an obligatory legal act. P1 can and statements which the parties may choose to abide by or disregard.
unilaterally exercise its right for obligatory set-off if the claims
are (i) mutual, i.e. P1 and P2 have claims against each other, (ii) 4.3 Do your construction contracts commonly have
commensurable, and (iii) due and recoverable. arbitration clauses? If so, please explain how
care to each other either in contract or under any Arbitration clauses are commonly used in construction contracts as
other legal doctrine? arbitration processes are considered quicker and more confidential
compared to civil processes. Typically, the Arbitration Rules of the
The mutual duty of care of contracting parties is confirmed in the Finland Chamber of Commerce are applied to arbitration procedures.
YSE 1998 and KSE 2013 conditions, as well as Finnish case-law. The parties may also agree to apply the arbitration process rules set
out in the Arbitration Act (967/1992).

4.4 Where the contract provides for international 4.6 Where a contract provides for court proceedings in
arbitration, do your jurisdiction’s courts recognise your jurisdiction, please outline the process adopted,
and enforce international arbitration awards? Please any rights of appeal and a general assessment of
advise of any obstacles to enforcement. how long proceedings are likely to take to reduce: (a)
Finland has ratified the 1958 Convention on the Recognition
and Enforcement of Foreign Arbitral Awards (the New York
Finland
Convention), which establishes the grounds and sets the limits for a The first instances for court proceedings in Finland are the District
local court to reject a foreign or international arbitral award. Courts. The judgment of a District Court can, with certain
requirements for leave, be appealed to an Appeal Court. An Appeal
Court decision can be further appealed to the Supreme Court, but
4.5 Where the contract provides for court proceedings only if the Supreme Court grants leave for such appeal. Leaves for
in a foreign country, will the judgment of that foreign
an appeal to the Supreme Court are only granted in special cases.
There are no set time limits for court proceedings and their duration
According to the Council Regulation (EC) No 44/2001 on jurisdiction depends on the nature and scope of each case. On average, legal
and the recognition and enforcement of judgments in civil and processes could be said to take approximately two years per court
commercial matters, a judgment given in an EU country is to be instance.
recognised without special proceedings, unless the recognition is
contested.
Aimo Halonen Juho Lönnblad

Mäkitalo Rantanen & Co Ltd, Mäkitalo Rantanen & Co Ltd,
Attorneys-at-Law Attorneys-at-Law
Eteläesplanadi 12 Eteläesplanadi 12
FI-00130 Helsinki FI-00130 Helsinki
Finland Finland
Tel: +358 40 591 2470 Tel: +358 50 573 5373

Email: aimo.halonen@makitalo.fi Email: juho.lonnblad@makitalo.fi
URL: www.makitalo.fi URL: www.makitalo.fi
Partner Aimo Halonen focuses on construction and energy sector Partner Juho Lönnblad is a well-known professional with 15 years
projects, with a particular emphasis on advising property holders of experience in the real estate and civil construction industry. Mr.
and project owners on complex contractual issues, legal project Lönnblad focuses on construction and real estate projects. He puts
management and related matters in various real estate and particular emphasis on providing project owners with comprehensive
construction projects. Mr. Halonen is a leading lawyer in the field legal project management support from the early development phases
with over 10 years of experience with the firm. He has advised, inter of a project until the final acceptance of a fully completed and operating
alia, the Finnish State’s real estate company, ministries, some of the building. He is also experienced in appeal procedures and disputes
largest cities in Finland, church parishes, listed companies and a related to real estate and construction.
range of energy utilities in their real estate projects and transactions,
procurement processes, plant delivery contracts and project
management. Mr. Halonen is also experienced in appeal procedures
and disputes related to construction projects.
Mäkitalo Rantanen & Co Ltd, Attorneys-at-Law is located in the centre of Helsinki. We are a mid-sized firm of 20 lawyers. Our firm specialises in
construction and energy projects, including the related environmental and real estate matters. We offer a unique approach and concept tailored for
project owners in construction projects. Our comprehensive legal project management approach significantly reduces the risk of cost overruns and
disputes through preventive measures, a clear set of rules and defined processes for project issues. We have extensive experience and references
in the largest and most complex construction projects in Finland. As a rule, we act as the advisor for the project owner.

Chapter 10
Germany Dr. Christian Bönker
Kapellmann und Partner Rechtsanwälte mbB Prof. Dr. Martin Jung
for the registration of added costs occasioned by changes) may be

observed. Special requirements imposed on the transparency of
tender and contractual documents may further flow from GWB’s
1.1 What are the standard types of construction contract (Act Against Restraints of Competition) formal rules for awards
in your jurisdiction? Do you have contracts which governing public clients and the award rules; since vague tender
place both design and construction obligations terms represent a common cause of disputes regarding deadlines
upon contractors? If so, please describe the types of and costs, the formal and correct assessment and representation of
contract. Please also describe any forms of design- the parties’ regulatory intent at the closing constitutes a principal
task of the lawyer providing advice.
and with the construction work done by a series 1.3 In your jurisdiction please identify whether there is
of package contractors? (NB For ease of reference a concept of what is known as a “letter of intent”, in
throughout the chapter, we refer to “construction which an employer can give either a legally binding or
contracts” as an abbreviation for construction and non-legally binding indication of willingness either to
engineering contracts.) enter into a contract later or to commit itself to meet
The most important types of construction contracts continue to be or not a full contract is ever concluded.
the unit price (volume-based, compensation by unit price) and the
flat rate (fixed compensation regardless of volume) formats. The The letter of intent is not frequently found in private building law.
execution of the unit price contract is typically preceded by the Instead, parties rely on contracts proceeding in separate stages by
client’s execution planning, which in turn is created on the basis structuring the pertinent performance aspects in the form of distinct
of a separate contract for work and labour with a planning firm. portions that may even be used in isolation. In the case of a planning
A flat rate contract is usually based on lower depths of planning, contract, this may concern the assignment of the services making up
which is why the definition of performance interfaces between the tender (performance stages 6 and 7 pursuant to the Fee Structure
construction and planning contracts is an important issue, especially for Architects and Engineers (HOAI)) or object monitoring
with major projects. In order to minimise interface risks, planning (performance stage 8 pursuant to HOAI); for construction contracts,
and construction services are combined in a uniform contractual occasionally the client may already work with the potential contractor
document, especially in cases of what are known as total/general during the planning stage, while simultaneously reserving the right
contractor awards. to involve third parties in the project’s realisation, whether wholly
or in part, under certain circumstances (the so-called construction
team process).
As a rule, construction contracts may be entered into formlessly. In
the interest of adequate documentation for the contractual obligations The “classic” building insurance policies remain to this day
assumed, however, it is prudent to put the agreement, along with all Builder’s Risk and Construction All-Risk. For larger projects, by
pertinent annexes, in writing (e.g., in the form of specifications or contrast, the trend points in the direction of adequately covering all
plans) and authenticate it by having all parties sign it. Increasingly, risks for each party involved in the project under the umbrella of
contractual documents are exchanged electronically – using so-called project insurance. This eliminates the need, in possible damaging
project data rooms, for instance. In some instances, it may have to events, for suing multiple contractual partners covered by different
be clarified how selective statutory written-form requirements (as insurers.

Kapellmann und Partner Rechtsanwälte mbB Germany
defects. In light of the contractor’s existing obligation to render

1.5 Are there any statutory requirements in relation advance performance, the pertinent case law has tended to take a
to construction contracts in terms of: (a) general critical view of the security clauses used in part on the client’s side.
The fees paid to banks or insurers for guarantees (which contractors
sub-contractors); (c) tax (payment of income tax of naturally include in their contract rates), too, occasionally prompt a
employees); or (d) health and safety? departure from excessive security arrangements.
Germany
Aside from the pertinent provisions of the new 2018 works 1.8 Is it possible and/or usual for contractors to have
and construction contract law under the Civil Code (BGB) (§§ retention of title rights in relation to goods and
631 et seqq. BGB) and the general terms and conditions to be supplies used in the works? Is it permissible for
agreed separately under the Construction Tendering and Contract contractors to claim that until they have been paid
Regulations, Part B (VOB/B), the parties to a construction contract
may incur legal obligations from various provisions of employment,
tax and health protection law. In the area of employment and social
insurance law, questions may arise as to the mandatory transfer of As a rule, materials permanently bound to a structure or property
employees, the law on posted workers or the Minimum-Wage Act. automatically become the property of the purchaser. According
For tax purposes, questions of sales tax play an outsized role – in to the Civil Code, even items that have not been installed are
addition to those of the so-called construction withholding tax. And protected against so-called tortious interference if and to the extent
subject to the pertinent building codes, employment law and the that they passed into the developer’s property. For this reason,
construction-site ordinance, safety and health protection measures contractors and suppliers generally are not entitled to remove items
must be taken; the safety and health protection coordinator (so-called they introduced on account of unpaid invoices. Subject to certain
SiGeKo), to be appointed under the construction-site ordinance, is conditions, however, provisions under copyright law, for instance,
to establish framework conditions for this. may limit the availability to the client of a completed work product.
The architect’s copyright should be mentioned first in this context,
and such limitations of use may also concern the use of patents and
1.6 Is the employer legally permitted to retain part of trademarks in some cases.
are substantially complete; and/or (b) any agreed 2 Supervising Construction Contracts
Whether and to what extent the client may withhold a portion of the 2.1 Is it common for construction contracts to be
agreed fee until the construction project has been fully completed supervised on behalf of the employer by a third
is to be established individually in consideration of the restrictions party? Does any such third party (e.g. an engineer
in place specifically for standard agreements. According to the
pertinent case law, which increasingly favours contractors, the it only one which exists in certain situations? If so,
client must not hold an excessive amount of security despite the please identify when the architect/engineer must act
contractor’s obligation to render advance performance, especially impartially.
if such security takes the form of cash withholdings combined with
security by way of performance or defect bonds. However, up to 10% Construction supervision represents a critical service provided
of verified payments on account may be acceptable even today, and by architects and engineers, which specifically encompasses the
particularly in the areas of consumers and developers. A distinction determination of how far performance has progressed ahead of
is to be made between routine security withholdings and those made billing, quality control with a view to possible defects, follow-up
on account of defects; while a so-called pressure premium may be management regarding changed or added services as well as the
assessed until defects have been removed, contractors may object to preparation and transaction of complex completion, acceptance
non-transparent or materially unjustified deductions. and commissioning processes. Insofar as such processes in general
contractor projects are typically characterised by the fact that the
1.7 Is it permissible/common for there to be performance general contractor bears responsibility first for coordinating and
bonds (provided by banks and others) to guarantee monitoring any subcontractors it uses, and the scope of performance
performance, and/or company guarantees provided to of service providers engaged is defined according to interface
guarantee the performance of subsidiary companies? aspects, the assignment of work to individual trades may well
Are there any restrictions on the nature of such bonds serve the purpose of controlling a high number of contractors (in
and guarantees?
the double digits). For this reason, architectural and engineering
firms can be set up quite differently when it comes to planning
A distinction must be made between agreed security and that and monitoring, and this is true not least of all because, in many
permitted by law. To secure its claims for compensation for work instances, technically sophisticated aspects such as fire protection
performed, the contractor may demand that the client furnish security or building automation systems are to be checked as specialised
by law under the pertinent rules of the Civil Code, with the quality of fields in addition to construction-related work in a narrower sense.
such security being legislated in detail; so-called group guarantees Since the object monitor may be liable, along with the contractor,
or letters of comfort provided by corporate parents do not suffice for defects that it caused by itself or with others as joint and several
as a rule. However, security of this nature gains in significance if debtors, the services in question entail significant potential liability
and to the extent that the contractor is required to furnish security for architects and engineers.
for the performance of its contractual obligations or the removal of

statutory right to give directions. Clients are now entitled to direct

2.2 Are employers entitled to provide in the contract that the performance of services that were not part of the original scope
they will pay the contractor when they, the employer, of performance. Services that are required for the realisation of
the contractual object of performance may be demanded without
paid” clause? restrictions of any kind, § 650 b (1) sentence 1 no. 2 in conjunction
with sentence 2 of the Civil Code (BGB). Services that amount to
changes to the original object of performance may be demanded
Germany
Within a contractual chain, the obligations assumed by the
only to the extent that they do not impose an unreasonable burden
parties must first be considered independently from one another,
on the contractor, § 650 b (1) sentence 1 no. 1 in conjunction with
which is why a subcontractor is entitled in legal relations with
sentence 2 BGB. In both cases, another limitation applies: both
the general contractor to be compensated for services rendered
sides must first endeavour for 30 days to bring about an agreement
even if the general contractor does not receive payment from the
about the execution of and the price for the service requested by
client. Provisions that deviate from this rule may be negotiated
the client. Only after this period has lapsed may the client direct
for individual contracts on a case-by-case basis. In standard
the performance of the service in question, § 650 b (2) BGB. The
agreements, however, clauses of this nature may very well be
template provided by the Construction Tendering and Contract
deemed violations of the provisions on the effectiveness of general
Regulations, Part B (VOB/B), which was frequently agreed upon
terms and conditions. Therefore, general contractors in particular
prior to 1 January 2018, continues to be an option, though its rights to
are well advised to consider availing themselves of legal rights
give directions are not aware of the 30-day period. Over the coming
to security with a view to minimising any risk related to advance
years, the courts will have to settle the question whether this option
performance.
of giving directions unbound by any period will continue to be
regarded as effective for purposes of general terms and conditions.
paid by the contractor to the employer in the event of 3.2 Can work be omitted from the contract? If it is
particular breaches, e.g. liquidated damages for late omitted, can the employer do it himself or get a third
completion? If such arrangements are permitted, are party to do it?
does the sum to be paid have to be a genuine pre- Without the client’s consent, the contractor is not entitled to refuse
performance of tasks assigned to it, whereas the client is entitled
pay a sum which is wholly unrelated to the amount of
at any time to revoke the assignment of certain tasks given to the
contractor. Under German law, this would be considered a partial
termination of services already contracted out. In the event that
Contractual penalties should be used to address instances in which
such partial termination is effected in the absence of cause, the client
binding deadlines are missed. Although the occurrence, amount
must compensate the contractor at the agreed rate even for services
or proof of specific damages do not matter to such extent, fixed
that were not rendered, such payment to be adjusted only by any
penalties that accrue as a flat rate by the day may be applied on
expenditures the contractor saved as well as any alternative gainful
the basis of contractual penalty clauses. The pertinent case law
activity on its part, § 648 and § 8 (1) VOB/B. By contrast, the
provides that such clauses be subjected to a critical examination
possibility of partial termination for cause, such as failure to perform
regarding specificity, the significance of culpability, daily rates
or remedy defects despite prior notice, is subject to limitations in
and caps, especially on the basis of aspects of general terms and
that it must refer to a definable (§ 648 a (2) BGB) or a self-contained
conditions (AGB). Irrespective of the effectiveness of contractual
(§ 8 (3) item 1 sentence 2 of the VOB/B) portion.
penalty clauses, the claimant may assert a claim for damages in an
amount exceeding the contractual penalty. If, in the event of default,
an elevated liability risk looms (e.g., because construction work is 3.3 Are there terms which will/can be implied into a
performed on economically significant industrial manufacturing construction contract?
facilities), the parties should illustrate conceivable scenarios in a
transparent manner and provide for agreements limiting liability Until 31 December 2017, there were no specific legal regulations
in consideration of the amount of available insurance coverage. for construction contracts. For this reason, the VOB/B (standard
Generally speaking, the question as to fault will almost invariably contractual terms for the execution of construction services) were
be a controversial one in cases of delays, which is why, in many developed, which have served as standard terms and conditions
of these cases, the contractor’s claims for added costs on account for construction contracts for decades. They contain, and have
of the duration of construction (which in building-related cases are contained for some time, construction-specific rules, such as the
exorbitant) are opposed by the client’s claims related to contractual client’s right to give directions (§ 1 (3) and (4) VOB/B) or the
penalties and damages caused by delays. contractor’s right to payments on account (§ 16 (1) VOB/B), which
only gradually found their way into the Civil Code in recent years.
Even today, they contain provisions on the consequences from
3 Common Issues on Construction disruptions to and interruptions of construction work (§§ 5 and 6 of
Contracts the VOB/B), which the Civil Code does not address specifically for
the construction arena to this day. Since the VOB/B were developed
and are updated jointly by and with equal input from client and
contractor groups, the legislature accords privileged status to the
VOB/B, in § 310 (1) sentence 3 BGB, when it comes to a review
of individual provisions for compliance with the law governing
When the new construction contract law came into effect on 1
general terms and conditions.
January 2018, Germany joined other nations in granting clients a

associated with unforeseen ground conditions as a quintessential

3.4 If the contractor is delayed by two events, one the client risk, which is why clients have frequently tried to transfer it
to the contractor in construction contracts. The law, however, has
extension of time; or (b) the costs occasioned by that favoured a differentiated approach in recent years and no longer
concurrent delay? recognises the risk’s assignment to the client as dogma. Instead,
the contractual provisions are to be examined for details about soil
conditions and any indication that, according to the contractual
Germany
Pursuant to § 6 (2) of the VOB/B, the contractor is entitled to an

extension of the construction period if and to the extent that it documents, even unanticipated deviations from such conditions
faces obstacles to its capacity for rendering performance due to have been moved into the contractor’s sphere of risk. For purposes
circumstances found within the client’s sphere of risk or resulting of the terms governing general terms and conditions, however, any
from strike or a lock-out ordered by the client’s trade association wholesale assignment of the risk of unforeseen ground conditions to
at the contractor’s own place of operations or a business working the contractor continues to be subject to stringent limitations.
directly for it, or due to force majeure or other circumstances beyond
the contractor’s control. Circumstances within the client’s sphere of
risk include approvals and plans to be obtained – but not provided in affecting the completion of the works?
time – by the client, along with delays in advance services owed by
other contractors engaged by the client. Such right to an extension
In construction contracts placed within the purview of the VOB/B,
of the construction period exists even if the contractor’s inability
to work during the period of obstruction stems additionally from the building performance must adhere to the technical norms in
factors attributable to the contractor. In such cases, however, the place at the time of acceptance (§ 13 (1) sentence 2 VOB/B). The
contractor may not demand financial compensation since that would Civil Code does not contain these specifications. Nevertheless,
require that the obstacle occurred through no fault of the contractor’s consideration should be given to the option of applying the
own and that the contractor is ready to render performance (§ 642 contractor’s obligation to register concerns about the performance
BGB and § 6 (6) VOB/B). with which it is tasked even in constellations in which the legal –
and technical – requirements undergo changes after the closing. If
the contractor is required to meet the new, current requirements
either under the VOB/B, or at the client’s direction, it is entitled
delays but the employer uses up that period by, for to a claim for additional compensation with respect to the altered
example, a variation, is the contractor subsequently performance so long as the changes to the legal or technical norms
entitled to an extension of time if he is then delayed could not be foreseen at the time of the closing.

It is not unusual for contractors to build buffer periods into their
construction schedules, and they need not identify and use such
buffer periods for clients. Only once it has become clear at the end
of the construction period that the contractor no longer needs the The copyright typically rests with whoever renders the performance
buffer periods are they to be used for the client’s benefit. So long in question. However, protection under copyright law is not available
as that is not clear, however, the client’s actions having an impact to each aspect of performance. Instead, a certain depth of creation
(e.g., directions altering performance) must be compensated for by is needed to justify such protection for the work in the first place. If
extensions if and to the extent that services added in the process take protection under copyright law is available, one must differentiate
additional time to order, prepare for and execute. as follows: the “moral right” (Urheberpersönlichkeitsrecht)
encompasses the right of publication, the right to be credited as the
creator and protection against the defacement of the work product,
a construction contract may no longer bring claims all of which cannot be transferred as a rule. By contrast, “rights
against each other? How long is that period and from of use and exploitation” (Nutzungs- und Verwertungsrechte) with
what date does time start to run? respect to the copyright may be transferred to the recipient (here: the
client). Contracts typically contain specific clauses to that effect,
In Germany, claims lapse after three years as a rule (§ 195 BGB). lest it should be determined based on the object of performance in
Unless another starting date has been specified, the period of question whether and to what extent rights of use and exploitation
limitation commences upon the end of the year during which the under copyright law were transferred to the client.
claim came about and the client learns of the circumstances giving
rise thereto as well as the identity of the obligor – or would learn
thereof if not for gross negligence. Special rules apply to warranties
under service and construction contracts. These claims typically do
not expire until five years have lapsed for objects of performance, The contractor must complete its performance on or before the
the realisation of which takes the form of rendering planning or agreed completion date. Even if either the contractor or the client
monitoring services (§ 634 a (1) and (2) BGB). In § 13 (4), the allowed for ample time, the contractor need not work faster than
VOB/B provides different warranty periods for different types of necessary in order to meet the completion date. In other words, it
services. Nevertheless, the four-year period specified therein is may take breaks or adjust the number of staff assigned to the project.
typically extended to five years by way of contractual agreement. By contrast, setting specific contractual milestones facilitates more
narrow requirements, though it is true irrespective of the number
and nature of agreed deadlines that the contractor is released from
conditions?
its obligation to render performance if and when the client fails
to assist with the contractor’s performance as required – e.g., by
obtaining building permits or conducting planning.
As a rule, the parties to a construction contract regard the risk

buildings asserting claims, including but not limited to those under

3.11 On what grounds can a contract be terminated? Are warranties, against the contractor. For this purpose, one must
there any grounds which automatically or usually differentiate as follows: with respect to contractual claims, such
rights are available only if the original client has assigned them to
expressly? the purchaser or user, whereas there are extra-contractual claims that
may be asserted against the building contractor in cases of violations
of absolute legal interests (e.g., life, body, health as well as property
Germany
The client may terminate the contract at any time and, thus,
or possession).
without cause (§ 648 BGB and § 8 (1) VOB/B). The contractor
is not entitled to terminate without cause. However, by way of
compensation for the right to terminate freely and without cause, 3.14 Can one party (P1) to a construction contract which
the client must make payment to the contractor in the full amount, owes money to the other (P2) set off against the sums
such payment to be adjusted only by any expenditures the contractor due to P2 the sums P2 owes to P1? Are there any
saved as well as any alternative gainful activity on its part. By
contrast, both parties have a right to terminate for cause if the other
party provides such cause, in which case only the services rendered Set-off is possible (§§ 387 et seqq. BGB). It requires that the claim
to date are subject to compensation. Furthermore, the blameless which is to be adjusted is both due and undisputed. The right of
party is entitled to damages. On the client’s side, important causes set-off may be qualified by mutual agreement. However, the law
for termination include defective or delayed performance by the governing general terms and conditions permits such restrictions
contractor despite repeated notices as well as the contractor’s only so long as the right of set-off is not qualified when it comes to
insolvency or anti-competitive conduct. On the contractor’s side, undisputed or effectively established claims.
such causes are the client’s default in payment or failure to assist
despite repeated notices. Since 1 January 2018, § 648 a BGB sets 3.15 Do parties to construction contracts owe a duty of
forth these principles for client and contractor, whereas the VOB/B care to each other either in contract or under any
differentiates between the client’s right of termination under § 8 (2), other legal doctrine?
(3) and (4), and that of the contractor in § 9.
As a rule, the parties’ duties flow from the contract and applicable
3.12 Is the concept of force majeure or frustration known legal provisions. German law recognises duties of protection and
in your jurisdiction? What remedy does this give care already in the context of the run-up to the closing (§ 311
the injured party? Is it usual/possible to argue BGB). The construction contract, moreover, imposes a “duty
successfully that a contract which has become of cooperation” on the parties, which means that the parties to a
uneconomic is grounds for a claim for force majeure? contract, subject to the VOB/B, are bound by a duty to cooperate
with one another throughout contractual performance. For this
German law recognises “force majeure” and “frustration of reason, there are obligations and duties of cooperation and mutual
performance”. In terms of provisions specific to a construction information, with Germany’s Federal Court of Justice stressing that
contract, such events initially give rise to a claim for an extension the duty of cooperation is intended to procure, among other things,
of the construction period. In cases in which the contract cannot that differences of opinion in cases in which one or both parties
be consummated because performance is impossible for all parties deem a contractual amendment necessary are settled amicably
involved objectively, or for the obligor subjectively, § 275 BGB (BGH, ruling dated 28 October 1999 – VII ZR 393/98).
applies to the effect that the obligor is released from its obligation
to render performance. The client’s associated claims for damages
or the reimbursement of expenditures are subject to a differentiated ambiguous, are there rules which will settle how that
regime, with the mere inefficiency of a contract not being equated ambiguity is interpreted?
with force majeure or frustration of performance. Instead, this
case is governed by the construct of the “lapse of the basis of the German law, too, is vulnerable to the possibility of contractual
contract” (Wegfall der Geschäftsgrundlage), § 313 BGB, which arrangements requiring interpretation. The parties may specify how
applies to cases in which certain assumptions that both parties regard they want provisions in need of interpretation to be constructed. In
as essential to the contract are proved incorrect. If this condition the event that the contract is subject to the VOB/B, § 1 (2) thereof
is present, the contract is to be amended to approximate how the stipulates a certain order for the contractual bases in cases of conflict.
parties would have written it if they had foreseen such development. As a rule, however, both the BGB and the VOB/B hold that detailed
and specific contractual stipulations are to prevail over general ones,
3.13 Are parties which are not parties to the contract and more recent provisions are to be given preference over older
entitled to claim the benefit of any contract right ones. In addition, contractual provisions and specifications for
which is made for their benefit? E.g. is the second or performance are to be constructed as a cohesive whole.
building? 3.17 Are there any terms in a construction contract which
are unenforceable?
German law recognises agreements for the benefit of third parties,
which a party purposely enters into with the goal of allowing All obligations the parties addressed in the construction contract
third parties to assert rights on the basis thereon. German law are enforceable, although there is an exception to the rule: the
additionally recognises agreements that provide protection for the pertinent case law treats the client’s acts of cooperation as “duties”
benefit of third parties, under which third parties are to be shielded (Obliegenheiten) that are not enforceable, rather than obligations
by way of contractual arrangements. However, the question posed (Pflichten) that are. For instance, in the event that the client fails
here likely is concerned with the notion of subsequent owners of to obtain building permits or conduct planning as required, the

contractor may demand that it be compensated financially for experience. At this time, however, it is assumed that claims based
the resulting period of obstruction, and it may even terminate on defects as well as rights of retention may be addressed as part of
the contract for cause following the lapse of the applicable legal the proceedings as well.
deadline. However, it cannot compel the client to obtain such
building permits or conduct such planning by means of legal action. 4.3 Do your construction contracts commonly have
Germany

are the designer’s obligations absolute or are there The VOB/B, as the template for construction contracts, did and
limits on the extent of his liability? In particular, does does not provide for an arbitration clause. Only § 18 (2) entitles the
the designer have to give an absolute guarantee in contractor of agreements with government agencies to appeal to the
competent office for resolution in cases of differences of opinion.
§ 18 (3) VOB/B allows for the stipulation of extra-judicial dispute
Construction and planning contracts are considered contracts for work resolution mechanisms. As a result, clauses of this nature to date
and labour, and the same is true for building contractors responsible are found in construction contracts only if either party or its legal
for planning. The contractor owes successful performance and counsel took care to include them. No clear favourite has emerged
bears liability for defects or delays. Until the object of performance in Germany when it comes to the type of process agreed for conflict
has been realised, it is required to expend the requisite resources, resolution. In many cases, mediation clauses from the association
which is why the obligation to remedy defects exists irrespective of of construction and real estate mediators (Verband der Bau- und
culpability. By contrast, the contractor is liable for damages only if Immobilienmediatoren) are incorporated (www.vdbauimm.de).
it is culpable and the defect could have been avoided by applying Otherwise, adjudication, conciliation and arbitration clauses are used.
the customary care. Such liability is unlimited as a rule unless the
contract provides for limitations thereof. However, the contractor’s
liability for intentional misconduct and gross negligence cannot be arbitration, do your jurisdiction’s courts recognise
qualified by way of its general terms and conditions. and enforce international arbitration awards? Please
Germany is a signatory of the U.N. Convention on the Recognition
and Enforcement of Foreign Arbitral Awards and the Hague
4.1 How are disputes generally resolved? Convention on Jurisdiction and Foreign Judgments in Civil and
Commercial Matters, which is why arbitral awards are recognised
in accordance with these conventions. The recognition of an arbitral
It is preferable that conflicts be processed and resolved by way of
award’s substantive force of law depends on whether it is consistent
negotiation. If this approach fails, the dispute’s resolution requires
with the fundamental principles of the German code of law; for
third-party support. In the event that the parties did not already agree
now, such arbitral awards are assumed to stand. As part of the
to means of extra-judicial arbitration when entering into the contract
enforcement of foreign arbitral awards, therefore, the party opposing
or at a later point in time, either of them may appeal to a civil court.
enforcement must plead the reasons and prove why recognition and
Legal action continues to be by far the most prevalent method of
enforcement are to be denied.
processing conflicts, and yet parties to construction contracts have
become conscious of the weaknesses of legal proceedings when it
comes to dispute resolution, which is why they – and those helping 4.5 Where the contract provides for court proceedings
them to draft their contracts – frequently endeavour to include in a foreign country, will the judgment of that foreign
clauses designed to prevent conflict, address them and resolve them
extra-judicially. Consequently, mediation and adjudication are used
with increasing frequency. The option to enforce foreign judgments in Germany is governed
by § 328 of the Code of Civil Procedure (ZPO) and in cases of
judgments from signatories of the Brussels Convention on
4.2 Do you have adjudication processes in your Jurisdiction and the Enforcement of Judgments in Civil and
jurisdiction? If so, please describe the general
Commercial Matters by the Brussels Convention. This means
procedures.
that the judgments of foreign courts may be enforced in Germany
subject to certain procedural requirements. This is not the case if
While the law does not provide for adjudication proceedings, the foreign courts would not have jurisdiction under German law,
the parties are free to do so, and any adjudication proceedings so the defendant was unable to properly defend itself, the judgment is
agreed are subject to the applicable rules of procedure. When the inconsistent with certain other rulings, recognising the judgment
construction contract law came into effect on 1 January 2018, so yields an outcome that is patently incompatible with the principles
did the construction directive that specifies the temporary injunction of German law or reciprocity is not guaranteed.
proceedings for the construction contract. Pursuant to § 650 d
BGB, a temporary injunction in disputes regarding the right to
give directions under § 650b or the adjustment of compensation 4.6 Where a contract provides for court proceedings in
under § 650c does not require that special urgency be established
as the reason otherwise mandated for seeking injunctive relief how long proceedings are likely to take to reduce: (a)
once construction work has ensued. Thus, in cases such as these, a decision by the court of first jurisdiction; and (b) a
temporary and very fast injunctive relief is available to bring about decision by the final court of appeal.
a preliminary resolution of the question in dispute; a final resolution
may then be obtained in regular legal proceedings. Since the The parties to a construction contract must file their claims in
construction directive is still very much new, there is little practical regional courts as a rule; only disputes worth less than EUR 5,000.00,

which do not touch on the client’s right to give directions pursuant to on point of law. The Federal Court of Law exclusively looks into
§ 650b BGB or the amount of the claim for compensation resulting the proper application of the law, to the exclusion of a review of
from a direction given by the client (§ 650c BGB), may be brought to the facts of the case. Given the need for frequent discovery as well
district courts, § 23 no. 1 of the Court Constitution Act (GVG) (§ 71 as the complexity of relevant technical issues in many of these
(1) and (2) no. 5 GVG). Where regional courts have jurisdiction over cases, legal proceedings dealing with construction matters often
disputes arising from construction or architectural contracts, or from take longer than other civil cases, with lower-instance proceedings
engineering contracts, construction divisions – specialised in the typically lasting between one and four years, appellate proceedings
Germany
interest of higher-quality judgments – have been set up to deal with approx. two years and cases adjudicated by the Federal Court of
building services (§ 72 a no. 2 GVG). Here, Germany recognises Justice (where an appeal on points of law has been admitted or an
two appellate instances, with the higher regional court adjudicating objection against denial of leave to file appeal has prevailed) up to
appeals before Germany’s Federal Court of Law examines appeals three years.
Dr. Christian Bönker Prof. Dr. Martin Jung

Kapellmann und Partner Kapellmann und Partner
Rechtsanwälte mbB Rechtsanwälte mbB
Anna-Louisa-Karsch-Straße 2 Anna-Louisa-Karsch-Straße 2
10178 Berlin 10178 Berlin
Germany Germany
Tel: +49 30 3997 6941 Tel: +49 30 3997 6942

Fax: +49 30 3997 6991 Fax: +49 30 3997 6991
Email: christian.boenker@kapellmann.de Email: martin.jung@kapellmann.de
URL: www.kapellmann.de URL: www.kapellmann.de
■■ Studied law at Münster University, 1984 to 1990. ■■ Studied law at the Universities of Freiburg and Heidelberg, 1985
to 1992.
■■ Research activity at Münster University in construction and
environmental law (Prof. Dr Werner Hoppe), 1987 to 1991. ■■ Ph.D. 1991 to 1992.
■■ Ph.D. in environmental law, 1990 to 1991. ■■ Chairman and board member of the association of construction
and real estate mediators.
■■ Legal clerkship with the Higher Regional Court of Hamburg, 1992
to 1994. ■■ Chairman of the association for the certification of cooperative
behaviour on construction sites.
■■ Lawyer (Rechtsanwalt) since 1994, at Kapellmann since 1995.
Lawyer of the year for construction law (Berlin) – Handelsblatt/Best
“Christian Bönker is widely respected as a master of complex
Lawyers® “Germany’s Best Law Firms and Lawyers 2017”.
construction matters with a particular focus on contract drafting and
management.” – Who’s Who Legal Germany 2018. Recommended for private construction law; “collegial, good
knowledge”, competitor – JUVE German Commercial Law Firms 2017.
One of the leading senior partners in private construction law;
“competent and objective opponent”, competitor – JUVE German Prof. Dr. Jung provides comprehensive legal support for contract
Commercial Law Firms 2016 and 2017. drafting and project execution in the construction and real estate
sectors. Key practice areas include the legal project management
Christian Bönker garners praise from one satisfied interviewee for his
JurProM® in construction and architects’ law and project support in
“strong competence in construction law”, as well as his ability to be
the establishment and use of shopping centres as well as residential
“quick and secure in negotiations” – Chambers Europe 2018.
construction projects and infrastructure projects. In these areas he
One of the most frequently recommended lawyers for construction law also acts as mediator and arbitrator as well as representing parties
and public law – Handelsblatt/Best Lawyers® “Germany’s Best Law before the state courts.
Firms and Lawyers 2017”.
Recommended lawyer for real estate law – Legal 500 Germany 2018.
Kapellmann is a legal partnership that combines a high level of specialisation and academic standard in advising its clients with the efficiency of a
medium-sized company and individual client care. With about 130 lawyers, we work in six offices in Germany as well as in our EU office in Brussels.
“Steady, sound, excellent – this is how the firm’s reputation in its core fields can be described.” – JUVE German Commercial Law Firms 2017.
“Kapellmann und Partner in their present form are the result of an almost unparalleled success story.” – Kanzleien in Deutschland 2014.
Ranked as a “leading business law firm 2017”. – FOCUS-SPEZIAL Deutschlands Top-Anwälte 2017 (annual ranking of Germany’s leading lawyers
by FOCUS magazine).

Chapter 11
Hong Kong
Deacons Kwok Kit Cheung
contracting, with one main managing contractor Hong Kong is a common law jurisdiction. Offer, acceptance,
and with the construction work done by a series consideration and intention to create legal relations are all essential
of package contractors? (NB For ease of reference for establishing a legally binding contract.
There are no special requirements for construction contracts.
engineering contracts.) They do not even need to be evidenced in writing. In fact, it is
not uncommon for a formal construction contract not to have been
signed even after completion of the project.
For private projects, the contracts mainly used are the Standard
Form of Building Contract published by the Hong Kong Institute of
Architects, the Hong Kong Institute of Construction Managers and 1.3 In your jurisdiction please identify whether there is
the Hong Kong Institute of Surveyors. There are “with quantities” a concept of what is known as a “letter of intent”, in
and “without quantities” editions. The former is for use when bills which an employer can give either a legally binding or
of quantities are used. The latter is for use when bills of quantities
enter into a contract later or to commit itself to meet
are not used. certain costs to be incurred by the contractor whether
For public projects, Government Forms are used. The forms for or not a full contract is ever concluded.
building and civil engineering works are slightly different. In recent
years, the Government has been promoting the use of NEC3 and Yes. It is standard practice to have a letter of intent before signing
NEC4 contracts which are now generally used in all public projects the formal contract. It can be either legally binding, non-legally
except those issued by the Housing Authority. binding or partially legally binding (e.g. a commitment to pay actual
In addition, there are contracts which place both design and costs incurred in the event that the employer decides not to engage
construction obligations upon contractors, especially for specialised the contractor to complete the project) depending on the precise
projects such as the construction of hospitals. wording of the letter of intent. The court will look into the substance
of the letter of intent, rather than its label in determining whether it
One example of a design and build contract is the Government
is legally binding on the parties.
Standard Form of Contract for design and build projects. If NEC3
is used, there is no separate edition for design and build projects and
the same standard form will be used; the design obligations will be 1.4 Are there any statutory or standard types of insurance
set out in the Works Information of the contract document. which it would be commonplace or compulsory to
If it is a design-only contract, we will usually call it a consultancy For example, is there employer’s liability insurance
agreement with the designer, who is usually either the architect or for contractors in respect of death and personal
engineer. Employers in Hong Kong usually engage consultants to injury, or is there a requirement for the contractor to
undertake the design of construction projects. Design-only contracts have contractors’ all-risk insurance?
are therefore common in Hong Kong.
We do have management contracting arrangements in Hong Kong, It is compulsory for all employers in Hong Kong to take out
although this is not common. In recent years, such arrangements are employees’ compensation insurance for their employees.
common in nearby Macau for casino projects. Contractors and sub-contractors are therefore required by law to
take out such insurance for their workers. Other than that, there is no
statutory requirement for taking out insurance, although contractors
invariably take out contractors’ all-risk insurance for their projects.

Deacons Hong Kong
For the owners of the project, there is no requirement, and indeed

it is not common for them to take out insurance for contractors,
unless it is fitting out or renovation works that are to be carried out
in the owner’s existing building, for which the owner already has an 2.1 Is it common for construction contracts to be
insurance policy that covers the contractor’s liability. supervised on behalf of the employer by a third
Hong Kong
1.5 Are there any statutory requirements in relation contractor and employer? Is that duty absolute or is
to construction contracts in terms of: (a) general it only one which exists in certain situations? If so,
requirements; (b) labour (i.e. the legal status of those please identify when the architect/engineer must act
working on site as employees or as self-employed impartially.
Yes, almost invariably, construction contracts are supervised on
behalf of the employer by a third party, except for Government
There are no statutory requirements in relation to construction
projects, where an in-house architect or engineer may be designated
contracts generally, although it is common for employers to provide
by the employer. In the latter case, the contract should make
in the contract for their own specific requirements in relation to
this known to the contractor and set out under what situations
labour, tax and health and safety for the project. Health and safety the architect or engineer is required to act in accordance with the
of labour are generally protected by the Construction Sites (Safety) employer’s instructions, rather than impartially.
Regulations issued under the Factories and Industrial Undertakings
Ordinance (Chapter 59 of the Laws of Hong Kong). As mentioned above, whether the third party has a duty to act
impartially depends on the terms of the construction contract,
although the third party is generally required to act independently
1.6 Is the employer legally permitted to retain part of and honestly, which may overlap with acting impartially, but they
the purchase price for the works as a retention to be are not synonymous. In other situations, such as issuing instructions
on behalf of the employer, there is no duty for them to act impartially.
defects liability is complete? In the following situations, the third party usually must act
impartially:
Yes. It is legally permitted and indeed it is standard practice to have ■ certifying interim payment;
a retention, which will usually be released in the following manner: ■ assessing an extension of time for completion of the project;
half upon practical or substantial completion of the project; and half ■ issuing a certificate of non-completion;
upon expiry of the defects liability period or issue of a certificate ■ certifying a date of practical completion;
of making good defects, whichever is later. For Government
■ issuing a certificate of making good defects;
projects, the retention will usually be released after the issue of the
maintenance certificate. ■ assessing the value of variations;
■ assessing loss and/or expense; and
■ issuing a certificate of direct payment to a nominated sub-
contractor.
guarantee the performance of subsidiary companies? 2.2 Are employers entitled to provide in the contract that
Are there any restrictions on the nature of such bonds they will pay the contractor when they, the employer,
and guarantees? have themselves been paid; i.e. can the employer
It is common to require the contractor to procure a performance paid” clause?
bond of usually 5% or 10% of the contract sum. A parent company
guarantee is sometimes required, but this is not common. There Yes, although usually such clause is found in the sub-contract, rather
are no restrictions on the nature of such bonds or guarantees. In than the main contract; i.e. the main contractor will pay the sub-
our experience, “default bonds” are more common than “demand contractor when they have themselves been paid by the employer.
bonds” nowadays. The reason is that banks and insurance companies It has been proposed by the Hong Kong Government to make
charge high premiums for providing demand bonds. “pay when paid” clauses invalid, following the models of other
jurisdictions such as the UK and Australia. It is expected that the
1.8 Is it possible and/or usual for contractors to have legislation will be passed in the coming years.
supplies used in the works? Is it permissible for
It is not common for contractors to have retention of title rights. In there any restrictions on what can be agreed? E.g.
Hong Kong, contractors have little say in modifying standard terms does the sum to be paid have to be a genuine pre-
imposed upon them by employers. The usual term in Hong Kong estimate of loss, or can the contractor be bound to
provides that once materials arrive on site, they become the property
of the employer, whether paid for or not. However, suppliers do
usually have retention of title rights in their contracts.
Yes, this is done in practically all construction contracts in Hong
Kong.

Deacons Hong Kong
A liquidated damages clause will only be enforceable if it is not a Another important implied term from the contractor’s perspective is
penalty, i.e. if it is a genuine pre-estimate of loss. We are aware an implied promise to pay for work done. This implied term usually
that, in England, the Supreme Court has recently reformulated the applies when the formalities required for issuing instructions have
test to be applied when a contractual clause is challenged as being not been complied with, but the works have nevertheless been
a penalty clause. However, to date, Hong Kong Courts still follows carried out by the contractor.
the test set out in the English House of Lords judgment in Dunlop
Hong Kong
Pneumatic Tyre Company Ltd v New Garage and Motor Company

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

Deacons Hong Kong
I am not aware of any case where a party has successfully argued

3.7 Who normally bears the risk of unforeseen ground that a contract has become uneconomic, as the ground for claiming
conditions? force majeure, although it seems that in a rare case, a catastrophic
change in prices may justify frustration of a contract at common law.
The contractor normally bears the risk.
3.13 Are parties which are not parties to the contract entitled
Hong Kong
3.8 Who usually bears the risk of a change in law to claim the benefit of any contract right which is made
affecting the completion of the works? for their benefit? E.g. is the second or subsequent
owner of a building able to claim against the original
contracts in relation to defects in the building?
The contractor normally bears the risk.
Yes. In 2016, the Contracts (Rights of Third Parties) Ordinance

3.9 Who usually owns the intellectual property in relation came into effect, which enables a person (third party) who is not
to the design and operation of the property? a party to a contract to enforce a term of that contract (including
a term excluding or limiting liability) if: (a) the contract expressly
It depends on the terms of the contract. Standard terms usually provides that the third party may do so; or (b) the term purports
provide that the employer owns the intellectual property or at least to confer a benefit on that third party. The Ordinance applies not
has an irrevocable licence to use the design for the project upon only where a third party is named in the contract, but also where
payment of the design fees. they are expressly identified as a member of a class or as answering
a particular description. In a construction contract, this could be
achieved, for example, by naming the second or subsequent owner
of a building as the intended beneficiaries in the construction
contract.
Yes, by relying on an express provision of the contract, e.g. in
private project sub-contracts, if the main contractor fails to pay the It is, however, possible for the parties to the contract to contract out
certified sum to the sub-contractor and continues such failure for of the Ordinance by including a clause in the contract to the effect
seven days after the sub-contractor has given written notice of the that application of the Ordinance is expressly excluded and that it
same to the main contractor, the sub-contractor can suspend further does not confer any rights enforceable by third parties.
execution of the sub-contract works.
Apart from contractual rights to suspend works, it is generally 3.14 Can one party (P1) to a construction contract which
accepted that the contractor has no right to suspend works for non-
payment at common law. limits on the rights of set-off?
3.11 On what grounds can a contract be terminated? Are Yes, unless there is express provision in the contract that payment
there any grounds which automatically or usually is not subject to any set-off, which is very unusual in Hong Kong.
entitle the innocent party to terminate the contract? In fact, the right of set-off is regarded as an important common law
right which can only be excluded by clear language in the contract.
expressly?
There is a distinction between legal and equitable set-off in Hong
Kong. If the mutual debts are both liquidated, i.e. ascertainable
An innocent party can terminate the contract if the other party
without involving any assessment by the court, the debts can be
has committed a repudiatory breach. Termination on such ground
set off against each other, even if they are unconnected, e.g. if they
need not be set out expressly in the contract. What constitutes a
arose from different projects not arising out of the same series of
repudiatory breach has been explained in different ways in different
transactions. This is legal set-off. An unliquidated claim cannot
court judgments. Fundamentally, it refers to the conduct of a party
be set off against a liquidated claim, unless the claims are closely
which evinces an intention to no longer be bound by the terms of
connected with each other; for example, where they arise out of the
the contract. In the context of construction contracts, such conduct
same construction project or same series of transactions. The latter
includes the contractor abandoning the works or those situations
is equitable set-off.
where the cumulative effect of breaches is sufficiently serious to
justify the innocent party terminating the contract, e.g. persistent
delay in making interim payments to the contractor. 3.15 Do parties to construction contracts owe a duty of
In other cases, whether the breach is serious enough to justify other legal doctrine?
the innocent party terminating the contract may be controversial.
For the sake of clarity, modern construction contracts therefore
A contractor usually only owes a duty of care to the employer under
invariably set out expressly the circumstances in which the innocent the terms of the construction contract. In some circumstances, a
party will be entitled to terminate the contract. duty of care may exist in tort. However, the general position is that
the law does not favour concurrent liability in both contract and tort
3.12 Is the concept of force majeure or frustration known in construction contracts.
successfully that a contract which has become 3.16 Where the terms of a construction contract are
uneconomic is grounds for a claim for force majeure? ambiguous, are there rules which will settle how that
Yes. We do have the concept of force majeure and frustration, which

Yes. The starting point in construing a contract is that words are
will excuse the parties from further performance of contract.
given their ordinary and natural meaning, unless that would result

Deacons Hong Kong
in absurdity or inconsistency with the rest of the contract. Where

the language in the contract is ambiguous, the court will ascertain 4.3 Do your construction contracts commonly have
what a reasonable person (i.e. a person who has all the background arbitration clauses? If so, please explain how
knowledge which would reasonably have been available to the
parties in the situation in which they were at the time the contract was
made) would have understood the parties to have meant. In doing Yes. As mentioned above, the arbitration clause will usually require
Hong Kong
so, the court must consider all relevant surrounding circumstances. the parties to first attempt to resolve their disputes by mediation and if
If there are two possible constructions, the court is entitled to prefer that fails, either party may commence arbitration by serving a notice
the one which is consistent with business common sense. of arbitration on the other party. The procedures for conducting
arbitration should be similar to those in other jurisdictions. Parties
The contra proferentem rule will also be applied by the courts
will usually instruct lawyers to represent them in arbitration and
where there is doubt about the meaning of terms in a contract,
the procedures tend to be relatively formal and not much different
namely the words will be construed against the person who put
from court procedures (although often simplified, with fewer
them forward (i.e. the person who required the terms to be included
interlocutory hearings).
in the contract). However, there are cases in the UK holding that
the contra proferentem rule assumes less importance in modern
contracts. Whilst English cases are persuasive in Hong Kong 4.4 Where the contract provides for international
Courts, whether they will follow suit remains to be seen. arbitration, do your jurisdiction’s courts recognise
are unenforceable? Yes. Hong Kong is a party to the 1958 New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards,
It seldom happens. Parties sometimes argue that a liquidated by China’s accession to the Convention. Hong Kong Courts are
damages clause is unenforceable as a penalty. Please see the very supportive of arbitration and adopt an “enforcement biased”
answer to question 2.3 above for the criteria for setting aside a approach in dealing with applications to enforce foreign awards.
liquidated damages clause. However, it is quite difficult to set aside Enforcement may only be refused if a party can establish one of the
a liquidated damages clause. The current judicial attitude is that grounds set out in the New York Convention. Even in such case, the
parties to a commercial contract should be free to agree whatever Court retains a residual discretion to enforce the award.
terms they wish.

3.18 Where the construction contract involves an element in a foreign country, will the judgment of that foreign
of design and/or the contract is one for design only, court be upheld and enforced in your jurisdiction?
limits on the extent of his liability? In particular, does
Certain foreign judgments can be enforced in Hong Kong by
the designer have to give an absolute guarantee in
respect of his work? registration pursuant to the Foreign Judgments (Reciprocal
Enforcement) Ordinance. The Ordinance contains a list of those
countries whose judgments can be enforced in Hong Kong under the
Usually, the designer is only obliged to exercise reasonable skill and
Ordinance. The current list includes Australia, Austria, Belgium,
care, and commensurate with the size and nature of the project he
Bermuda, Brunei, France, Germany, India, Israel, Italy, Malaysia,
has undertaken in the contract. We seldom come across designers
the Netherlands, New Zealand, Singapore and Sri Lanka. Since
giving an absolute guarantee in respect of this work.
inclusion on the list is based on reciprocity (i.e. based on Hong
Kong judgments being enforceable in those countries), following
4 Dispute Resolution the handover of Hong Kong to China in 1997, Hong Kong’s
Department of Justice wrote to the countries listed in the Ordinance
for confirmation that post-1997 they would continue to enforce
4.1 How are disputes generally resolved? Hong Kong judgments. Brunei and Bermuda replied that they would
not; the Netherlands replied that Hong Kong judgments would be
They are mostly resolved by arbitration. However, a small recognised, but not enforced or executed; and no replies appear
proportion of main contracts and sub-contracts (in particular of low to have been received from Austria or Sri Lanka. Accordingly,
tier) may not contain an arbitration clause. In such cases, disputes although those five countries are still listed in the Ordinance, there is
will be resolved by way of court proceedings. some doubt about whether they can still be enforced in Hong Kong
Some construction contracts provide for a multi-tiered dispute by registration under the Ordinance.
resolution mechanism. For example, in the Hong Kong Standard At common law, foreign judgments of countries not listed in the
Form of Building Contract and Government forms, the parties have Foreign Judgments (Reciprocal Enforcement) Ordinance may still
to go through mediation first before commencing arbitration. be enforced in Hong Kong, provided that the following requirements
are satisfied:
4.2 Do you have adjudication processes in your (1) the judgment is for a debt or a definite sum of money;
jurisdiction? If so, please describe the general (2) the proceedings in which the judgment was obtained were not
procedures. opposed to natural justice;
(3) the foreign judgment was not obtained by fraud;
No, but in the consultation paper for implementing security of (4) the foreign judgment was rendered by a court with competent
payment legislation in Hong Kong in 2015, statutory adjudication jurisdiction;
has been proposed for resolving payment disputes in construction (5) the foreign judgment is final and conclusive;
contracts.

Deacons Hong Kong
(6) the enforcement and recognition of the foreign judgment is the Court of Final Appeal. If leave is granted, the case will go to the
not contrary to public policy; and Court of Final Appeal.
(7) the foreign proceedings were not brought in contravention The time from commencing proceedings to obtaining a judgment in
of an agreement under which the dispute in question was the Court of First Instance varies a lot depending on how vigorous the
to be settled otherwise than by proceedings in the courts of case is run by the parties. The minimum time for a straightforward
that country or (if there was such contravention) the person
and smooth running case is one year, but the norm is three years.
Hong Kong
against whom the judgment was given either agreed to the
bringing of the foreign proceedings or otherwise submitted to It may take another one year from the Court of First Instance to the
the jurisdiction of the foreign court. Court of Appeal and a further year to the Court of Final Appeal,
assuming there is no procedural delay in the process.
how long proceedings are likely to take to reduce: (a) Kwok Kit Cheung
a decision by the court of first jurisdiction; and (b) a Deacons
decision by the final court of appeal. 5th Floor, Alexandra House
18 Chater Road
Hong Kong
Legal proceedings are commenced in Hong Kong by issuing a
writ of summons, either in the District Court (for claims of over Tel: +852 2825 9427
Email: kwokkit.cheung@deacons.com.hk
HK$50,000, but no more than HK$1million) or the High Court, URL: www.deacons.com.hk
Court of First Instance (for claims of over HK$1million). Then
there follows the filing of pleadings (i.e. statement of claim;
defence and counterclaim; and reply and defence to counterclaim). Kwok Kit has over 30 years of experience in dealing with a variety of
This is followed by discovery of documents and exchange of private and government building projects in Hong Kong, some of which
witness statements and, in some cases, expert reports. Once any was gained when practising as a quantity surveyor. He also acts for
developers, contractors and subcontractors in construction projects, in
interlocutory applications have been resolved and the parties have
litigation, arbitration and mediation, and undertakes general advisory
complied with all court directions made in respect of the matter, a work in relation to construction contracts in Hong Kong, Macau and
trial date will be fixed by the Court. Mainland China. He conducts CIETAC arbitrations in Shenzhen,
Shanghai and Beijing and acts as an arbitrator and mediator in
Parties may appeal a judgment to the Court of Appeal within
construction and commercial disputes. He also handles cross-border
prescribed time limits. If the losing party is dissatisfied with the disputes involving Hong Kong, Mainland China and other countries.
outcome of the appeal, he may apply for leave to further appeal to
Deacons is Hong Kong’s own world-class law firm and provides an extensive range of legal and commercial services to local and international
businesses. With 16 key service areas and three representative offices in Beijing, Shanghai and Guangzhou, Deacons is the largest independent
local law firm with 50 partners, around 200 lawyers and lawyer equivalents, and approximately 700 employees overall.
Our principal legal services include Banking & Finance, Capital Markets, China Trade & Investment, Construction, Corporate M&A, Employment &
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Private Clients and Tax.
Recent accolades include:
■■ “Construction & Infrastructure Firm of the Year” (2016) and “Hong Kong Firm of the Year” (2014–2016) awarded by China Business Law Journal;
■■ “Hong Kong Firm of the Year” at the Chambers Asia Pacific Awards for Legal Excellence (2015–2016);
■■ “Hong Kong Firm of the Year” (2015–2017) awarded by IFLR; and
■■ “Citizenship Firm of the Year” awarded by The Asian Lawyer 2015.

Chapter 12
India Sumeet Kachwaha
Kachwaha and Partners Dharmendra Rautray
place both design and construction obligations upon construction contract (e.g. provision for adjudication
contractors? If so, please describe the types of or any need for the contract to be evidenced in
contracting, with one main managing contractor The Indian law of contracts is codified (Indian Contract Act, 1872
and with the construction work done by a series – the “Act”). It is largely based on English Common Law. For any
of package contractors? (NB For ease of reference binding contract to come into existence, there should be an agreement
throughout the chapter, we refer to “construction between two or more parties who are competent to contract, and the
contracts” as an abbreviation for construction and parties must have entered into the agreement with their free consent,
for a lawful consideration and a lawful object. These requirements
are mandated by the Act (Section 10 thereof). As all other contracts,
The construction industry in India does not subscribe to any standard construction contracts must also satisfy the aforesaid requirements
form of construction contract; however, some of the commonly to be legally enforceable. Further, rudimentary requirements of a
used forms include the suite of contracts published by FIDIC valid offer, followed by an acceptance of an offer, with the intention
(International Federation of Consulting Engineers), ICE (Institution of entering into a legally enforceable agreement not void in law,
of Civil Engineers) and the model published by the IIA (Indian are other essentials of a valid contract under the Act. As the Act
Institute of Architects). Governmental construction authorities, such provides, contracts need not be evidenced in writing, which similarly
as the National Highways Authority of India (“NHAI”), employ their applies to all construction contracts.
own standard form contract as per their departmental requirements,
particularly for public-private partnership projects. One standard
FIDIC form extensively used in the Indian construction industry 1.3 In your jurisdiction please identify whether there is
is the Plant and Design/Build Contract. Design-only contracts
prevalent in India are largely inspired by the FIDIC Conditions of non-legally binding indication of willingness either to
Contract for Plant and Design/Build (the FIDIC Yellow Book). enter into a contract later or to commit itself to meet
Besides the NHAI, several government departments such as the certain costs to be incurred by the contractor whether
Public Works Department, Delhi Metro Rail Corporation, Indian
Oil Corporation, National Building Construction Corporation,
Central Public Works Department, etc. have their own standard The legal position in India as regards a “Letter of Intent” (“LOI”) is
form contracts. well settled and can be understood while referring to common law
principle to the effect that an agreement to enter into an agreement
Management contracts are executed in the form of Engineering,
does not create any legal relation between parties, nor is it legally
Procurement and Construction Management Contracts. As the
enforceable before a court of law.
name suggests, such contracts are executed between employers and
contractors, wherein contractors are hired to holistically manage the A LOI merely indicates a party’s intention to enter into a contract
completion of a construction project while overseeing developments with the other party in future. Normally, it is an agreement to
regarding engineering, procurement and construction of a project. “enter into an agreement” which is neither enforceable nor does
it confer any rights upon the parties. However, some aspects of
a LOI may contain binding obligations, if so specifically provided
therein. Thus, confidentiality, exclusivity of dealings, governing
law/jurisdiction amongst others may create binding obligations.
In certain circumstances, a LOI may be construed as a letter of
acceptance of the offer resulting in a concluded contract between
the parties. It largely depends on the intention of the parties to be

Kachwaha and Partners India
drawn from the terms of the LOI, the nature of the transaction and Compensation Act, 1923, requires that compensation be paid
other relevant circumstances. If parties have acted on a LOI (as if to workers if injured in the course of employment. Under
there is a binding obligation), it can be held as constituting a binding the Minimum Wages Act, 1948, the employer is required to
contract between them. In India, a binding contract can result from pay the minimum wage rates as may be fixed by the relevant
conduct alone. government. Further, the Payment of Wages Act, 1936, read
with the Amendment Act of 2017 ensures that the employees
receive wages on time and without any unauthorised
1.4 Are there any statutory or standard types of insurance deductions.
India
which it would be commonplace or compulsory to (c) Tax: A person responsible for paying any sum to a contractor
have in place when carrying out construction work? for carrying out any work (including supply of labour for
For example, is there employer’s liability insurance carrying out any work) is required to, at the time of payment,
for contractors in respect of death and personal deduct tax commonly known as Tax Deducted at Source
(“TDS”) under Section 194C of the Income Tax Act. The
Works Contract Tax is applicable to contracts for labour, work
or service. Prior to 1 July 2017, the Central Government and
The standard type of insurance policy opted by the employer, State Government levied Service Tax and VAT respectively
contractor or a sub-contractor separately or jointly is the Contractor’s on works contracts. However, after the roll-out of the Goods
All Risk Policy (“CAR Policy”). All major construction contract and Services Tax (“GST”), works contracts (in relation to
projects expressly provide for putting in place a CAR policy during immoveable property) are treated as supply of services and at
the construction stage. Federal legislation requires any business present tax slabs range from 12% to 18%. In the first instance,
tax is payable by the person supplying the services/goods.
including construction projects employing more than 10 people to
The Building and Other Construction Workers Welfare Cess
procure registration under the Employees’ State Insurance Act, 1948
Act, 1996, which applies to 10 or more building workers or
(“ESI Act”). other construction work, has been enacted for the welfare of
The ESI Act mandates every employer to provide for its worker’s construction workers, including regulating the workers ’safety,
insurance. The said Act covers both workers employed directly health, and other service conditions. A cess of 1% is collected
under an employer and through a contractor. The insurance procured from the employer on the cost of construction incurred.
by an employer/contractor under the mandate of the ESI Act covers (d) Health and Safety: Social security legislations such as the
contingencies such as maternity leave, sickness, temporary or Employee’s Compensation Act, 2009, Employees’ State
permanent physical disablement, or death owing to the hazards of Insurance Act, 1948, Maternity Benefit Act, 1961, Payment
employment which may lead to loss of wages and earning capacity of Gratuity Act, 1972, and the Employees’ Provident Fund
Act, 1952 mandatorily apply to all employers and contractors
of an employee.
hiring labourers or workmen in the construction industry.
1.5 Are there any statutory requirements in relation

The following are some of the statutory requirements which must Yes. In construction contracts, provision for retaining part of the
be complied with: purchase price for the given situations is fairly common. Parties
may also agree to deposit the purchase price in an escrow account
(a) General requirements: As stated above, all construction
to ensure a level playing field for both the employer and the
contracts must satisfy the requirements of the Indian Contract
Act, 1872 to be legally enforceable. There are no statutory contractor. The contract may provide that the employer, prior to
requirements specifically in relation to construction contracts. completion of the works, releases the retention money provided the
contractor furnishes an unconditional bank guarantee equivalent to
(b) Labour: All employers and contractors are required to comply
with the relevant labour legislations in force in India or in the retention money.
the state/city concerned. The onus of complying with such
labour laws falls upon an employer or a contractor depending 1.7 Is it permissible/common for there to be performance
on the legislation. Labourers get their legal recognition from bonds (provided by banks and others) to guarantee
the definition of the word “workman” under the Industrial performance, and/or company guarantees provided to
Disputes Act, 1947 (Federal legislation) which entitles them guarantee the performance of subsidiary companies?
to various statutory benefits and fair treatment at the hands Are there any restrictions on the nature of such bonds
of their employer/contractor. Further, the Contract Labour and guarantees?
(Regulation and Abolition) Act, 1970 must be complied with
by any principal employer/contractor who hires 20 or more
Yes, performance bonds/performance guarantees are commonly
contract labourers for an “establishment”. The said Act
requires the principal employer to register its establishment provided for in construction contracts in India to provide security
in accordance with the Act, whereas all such contractors against failure of a contractor to perform its contractual obligations.
must obtain a licence from the authorised licensing authority Similarly, an employer may require company guarantees from
specified in the Act. In order to regulate the condition of parent companies against the duties and obligations of a subsidiary
service of inter-state labourers, the Inter-State Migrant company involved in a construction contract.
Workmen (Regulation of Employment and Conditions of The nature of restrictions that may apply to a performance guarantee
Service) Act, 1979, requires all contractors who employ five
will depend upon the wording of the terms of guarantee. A
or more inter-state migrant workmen to register themselves.
performance guarantee, in nature, is a contract between an employer
It is aimed to protect and/or provide a migrant worker’s
right to equal wages, displacement allowance, home and a guarantor, independent of the contract between an employer
journey allowance, medical facilities, etc. The Workmen’s and a contractor. Therefore, unless otherwise provided, a guarantor

shall be obliged to unconditionally honour a guarantee as and when

called upon by the employer. 2.3 Are the parties permitted to agree in advance a fixed
Normally, construction contracts require the contractor to furnish paid by the contractor to the employer in the event of
an unconditional performance bank guarantee to ensure timely and particular breaches, e.g. liquidated damages for late
satisfactory performance by the contractor. The employer normally completion? If such arrangements are permitted, are
requires the contractor to keep the performance bank guarantee valid there any restrictions on what can be agreed? E.g.
until the defect liability period is over or the completion certificate
India
is issued. The beneficiary of the bank guarantee, i.e. the employer, pay a sum which is wholly unrelated to the amount of
must make a demand for payment under the bank guarantee, should financial loss suffered?
a need so arise, before the expiry of validity period stipulated in the
bank guarantee. A demand made by the employer for payment after Yes. Stipulating a certain amount to be paid by a contractor to its
the validity period will not be honoured by the bank. employer as liquidated damages is permissible. Such damages are
governed by Section 74 of the Indian Contract Act, 1872 (“Act”)
1.8 Is it possible and/or usual for contractors to have which provides that if a sum is named in the contract as the amount
retention of title rights in relation to goods and to be paid in case of such breach of contract, the party complaining
supplies used in the works? Is it permissible for of breach is entitled to receive the said amount, “whether or not
contractors to claim that until they have been paid actual loss is proved to have been caused”. Section 74 has been
they retain title and the right to remove goods and judicially interpreted and the following principles have been laid
materials supplied from the site? down:
■ Only reasonable compensation can be awarded as liquidated
Yes it is possible. Right to lien over goods arises from the contractor’s damages.
right to be duly paid for the goods supplied to an employer. The ■ Notwithstanding a liquidated damages clause, the factum of
existence of right of lien over goods, and the scope of such right, is damage or loss caused must be proved (the burden for which
determined by a contractual clause to that effect. Lien over goods is on the Claimant).
whose ownership passes over to an employer on delivery to, or ■ The court must find the liquidated damages to be a genuine
affixation on, a construction site may exist if contractually provided pre-estimate of the damages.
for. However, most construction contracts do not provide for the ■ The expression “whether or not loss is proved” in Section 74
contractor’s title rights to the goods and supplies made for the works. has been interpreted to mean that if there is a possibility to
prove actual damage or loss, such proof is required. Where,
however, it is difficult or impossible to prove the actual
2 Supervising Construction Contracts damage or loss, the liquidated damages amount named in the
contract, if it is found to be a genuine pre-estimate of the
damage or loss, can be awarded.
2.1 Is it common for construction contracts to be ■ The proof of loss or damage may be circumstantial and the
supervised on behalf of the employer by a third court does not look for arithmetical exactitude.
or architect) have a duty to act impartially between ■ The amount named in a contract serves as a ceiling or a cap
contractor and employer? Is that duty absolute or is on the sum which can be awarded and not the amount which
it only one which exists in certain situations? If so, will mechanically be awarded.
please identify when the architect/engineer must act If parties have agreed to a genuine pre-estimated sum of money as
impartially. liquidated damages, then they are deemed to have excluded their
right to claim an unascertained sum of money as damages.
Yes, construction contracts are commonly supervised by third
parties in India who may be appointed by an employer in the role of
either an architect or an engineer. The scope of their functions and
duties are contractually defined. Contracts
Whilst the engineer or architect usually have a contractual duty to
act impartially between the contractor and employer, in practice in 3.1 Is the employer entitled to vary the works to be done
government contracts, the engineer in particular often toes the line under the contract? Is there any limit on that right?
of the employer.
Variations in the works to be performed under a construction contract
may be made by an employer or an engineer employed for such
2.2 Are employers entitled to provide in the contract that
they will pay the contractor when they, the employer, works. If such variations are made, a contractor is entitled to seek
have themselves been paid; i.e. can the employer additional payments for the same so far as such variations have been
include in the contract what is known as a “pay when duly authorised by the employer/engineer-in-charge. However,
paid” clause? such variations must not be of such a nature so as to substantially
alter the character of the contract in question and must be within the
Yes. Such clauses are valid under the Indian Contract Act. ability of the contractor to execute.

party to do it?
Yes, works may be omitted from a construction contract by an

employer or an engineer if there is an express term in the contract

permitting omission. However, such omissions must not be made

to deliberately deprive a contractor from its entitled share of works. 3.7 Who normally bears the risk of unforeseen ground
The employer cannot omit the work on non-bona fide grounds (and conditions?
have it carried out by someone else without the contractor’s consent).
It is for the parties to agree in the contract as to who shall bear
the risk of unforeseen ground conditions. Construction contracts
generally put all the risk on the contractor.
India
Yes. Indian law recognises use of both express and implied terms in 3.8 Who usually bears the risk of a change in law
a construction contract. While express terms are easily identifiable, affecting the completion of the works?
implied terms must be read into a contract while examining the
intention of the contracting parties. However, such terms must Most construction contracts provide for relevant stipulations for a
not offend the intended commercial purpose of the contract as change in law contingency. Generally, an employer bears the risk
understood between the parties. While there is no agreed set of terms arising out of a change in law, and any delays resulting out of it
which can be implied in a construction contract, certain obligations can be condoned by granting an extension of time to the contractor.
are understood as impliedly binding on both the employer and the Section 64A of the Sale of Goods Act, 1930 provides that in the
contractor. For example, a contractor is expected to perform its event of increase or decrease in tax or imposition of new tax in
tasks while exercising a standard of care, and must provide such respect of goods after the making of any contract for the sale or
materials which are fit to be used for the stipulated works. purchase of goods, in the absence of any stipulation as to payment of
such tax, any increase would entitle 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. However, in case of a decrease in
tax, the buyer would be entitled to deduct the equivalent amount
extension of time; or (b) the costs occasioned by that of decreased sum from the contract price and the seller would be
concurrent delay? liable to pay that sum to the buyer. The provision is applicable to
any duty of customs or excise on goods and to any tax on the sale
The Indian position on concurrent delay is not certain. In situations or purchase of goods.
where there are concurrent delays on the part of an employer
and a contractor, an employer may rely upon them to substitute 3.9 Who usually owns the intellectual property in relation
an extension of time for payment of any monetary damages to a to the design and operation of the property?
contractor, whereas a contractor may rely upon them to defend
against imposition of liquidated damages upon itself by an Generally, a contract for service contains clauses so as to empower
employer. Therefore, in cases of concurrent delays, a contractor an employer to claim ownership over all intellectual property as may
would be entitled to an extension of time and not to compensation be created by an employee in the course of his employment. Indian
for any loss it may have suffered due to the delays (see: De Beers law also provides for employment as an exception to an author’s
UK Ltd v. Atos Origin IT Services UK Ltd [2010] EWHC 3276 ownership over his intellectual property. Therefore, in the case of
(TCC)). A contractor would be entitled to an extension of time for construction contracts, ownership of intellectual property in the
the period of delay caused by the relevant event notwithstanding the form of design of concerned works should vest with the employer.
concurrent effect of the other event (see: Walter Lilly & Co Ltd v.
Mackay, [2012] EWHC 1773 (TCC)). Indian courts usually refer to
and rely upon English cases.
A contractor may suspend performance of its obligations under a

3.5 If the contractor has allowed in his programme a construction contract on grounds provided for in the contract in
accordance with its statutory right to do so under the Indian Contract
example, a variation, is the contractor subsequently Act, 1872. Occasions when a contractor may suspend performance
entitled to an extension of time if he is then delayed include non-performance of the obligations or considerable delay
after this float is used up? by an employer, non-payment of dues for works performed, non-
fulfilment of conditions upon which the performance is contingent,
The float in a programme would be dealt with on a ‘first come first force majeure, etc.
served’ approach. However, the existence of float may mean that
the contractor cannot claim an extension of time, but it does not stop 3.11 On what grounds can a contract be terminated? Are
the contractor from claiming loss or expense due to variation. there any grounds which automatically or usually
3.6 Is there a limit in time beyond which the parties to expressly?
what date does time start to run? The Indian Contract Act, 1872 (“Act”) allows a party to rescind/
terminate a contract in the event of breach by the other party,
The Limitation Act, 1963 (“Act”) governs a time period for filing a including refusal to perform or disabling himself from performing
court action and also a claim before the arbitral tribunal. As per the (Section 39 of the Act). Over and beyond the statutory grounds
said Act, the limitation period for the purpose of initiating a suit in of breach recognised in the Act, parties may choose to provide
relation to a breach of contract is three years from the date on which contractual stipulations recognising events which would amount to
the breach occurs or the cause of action arises. breach of the contract to entitle the injured party to terminate the

contract. A statutory or common law ground of breach need not be

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

Any guarantee given by a designer under a construction contract

would have relevance only against potential contractual claims for 4.4 Where the contract provides for international
a defect in design; however, such a guarantee would not keep his arbitration, do your jurisdiction’s courts recognise
liability under tort law at bay. advise of any obstacles to enforcement.
4 Dispute Resolution The Arbitration and Conciliation Act, 1996 (“Arbitration Act”)
recognises and provides for enforcement of foreign arbitral awards
India
in India; vide Part II thereof. The said Act gives effect to the
4.1 How are disputes generally resolved? Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, 1958 (“New York Convention”) and the Convention on the
There are multifarious ways of resolving disputes that are recognised Execution of Foreign Arbitral Awards, 1927 (“Geneva Convention”)
in India. These include resolving disputes by way of court litigation, with a specific reservation of principle of reciprocity under Sections
arbitration, mediation, conciliation, dispute resolution boards 44(b) and 53(c) of the Act. Under the New York Convention,
and judicial settlement. Arbitration is the most commonly used Indian Courts may recognise and enforce foreign arbitral awards
mechanism to resolve construction contract disputes. if the country is a signatory to the New York Convention and if the
award is made in the territory of another contracting state which is
4.2 Do you have adjudication processes in your
a reciprocating territory. Section 57 of the Act, enumerates the pre-
jurisdiction? If so, please describe the general requisites to enforce a foreign award under the Geneva Convention.
procedures. India is a signatory to the New York Convention, with reservations
that there should be a valid agreement to arbitrate, and that such
In the absence of a statutory enactment to refer a payment dispute to agreement must be evidenced in writing. Another reservation made
adjudication, adjudication process is subject to a parties’ agreement. by India is to the effect that the New York Convention would be
Generally, a clause containing the adjudication process would be applicable only to disputes and differences arising out of a legal
part of the dispute resolution clause wherein parties would resolve “commercial” relationship between the parties, whether contractual
disputes in the first instance through an adjudicator named in the or not. The Act mandates an award to be rendered in a country
contract. The contract would stipulate a time period within which which is a signatory to the New York Convention, and which
the contractor may refer a decision of the engineer to the adjudicator. has been duly notified in the Official Gazette of India as being a
It would also stipulate the time limit within which the adjudicator signatory to the New York Convention. This can cause hardships as
must give his decision. If either party is aggrieved by the decision whilst all important arbitration seats are recognised and notified, the
of the adjudicator, it may refer the dispute to arbitration within a Official Gazette has not notified all countries which are signatories
stipulated time period failing which the adjudicator’s decision will to the Convention.
be final and binding. Section 48 of the Act provides for conditions which must be satisfied
for enforcement of a foreign arbitral award in India under the New
4.3 Do your construction contracts commonly have York Convention (these are all as per the New York Convention).
arbitration clauses? If so, please explain how The public policy ground is narrowly construed in India for
arbitration works in your jurisdiction. enforcement of foreign awards.
One of the widely accepted means of dispute resolution in 4.5 Where the contract provides for court proceedings
construction disputes is arbitration. The Arbitration and in a foreign country, will the judgment of that foreign
Conciliation Act, 1996 (“Arbitration Act”) is the governing law court be upheld and enforced in your jurisdiction?
of arbitration in India. The Arbitration Act is essentially based
on the UNCITRAL Model Law, 1985 and UNCITRAL Model The procedure for enforcement of foreign judgments in India differs
Arbitration Rules, 1976. Broadly, the Act has two parts. Part I on the basis of reciprocating and non-reciprocating territories. In
is an elaborate code providing for all arbitrations seated in India case of “reciprocating territories”, judgments may be enforced
(domestic or international arbitrations). Part II provides basically directly as a decree and an execution decree may be obtained to this
for enforcement of foreign awards (see question 4.4). India is an effect from an Indian Court. On the other hand, judgments from
arbitration-friendly jurisdiction with a pro-arbitration Act and a “non-reciprocating” territories are not executed directly by a court
good track record of enforcement for foreign awards. There is, of law. A fresh law suit needs to be filed on the basis of the foreign
however, a problem of judicial delays. An important feature of the judgment within three years of the judgment for its enforcement.
Act is the requirement to conclude India-seated arbitrations within This suit can only be defended on the grounds specified under the
12 months of the tribunal entering into the reference, i.e. on the date Code of Civil Procedure, 1908 (“CPC”), i.e. due process ground.
the sole arbitrator or all the arbitrators receive notice in writing of Subject to the exceptions under Sections 11 and 13 of the CPC, these
their appointment. Parties may extend the stipulated period by six foreign judgments operate as res judicata in India.
months by consent. Thereafter, time can only be extended by court
and upon terms. There is currently a proposed amendment to the
12-month timeframe. The proposal is to commence the 12-month 4.6 Where a contract provides for court proceedings in
time period from the completion of the pleadings stage. This would
provide some relief to parties involved in sizeable construction how long proceedings are likely to take to reduce: (a)
arbitrations. The Bill was approved on 7 March 2018 by the Union a decision by the court of first jurisdiction; and (b) a
Cabinet. However, it is yet to be passed by both houses of the decision by the final court of appeal.
Parliament.
Proceedings before a court are initiated upon the receipt of a plaint
by one of the parties. The court then serves summons to the opposite

party to file their written statement. Issues are thereafter framed the Schedule, Limitation Act, 1963). If parties are not satisfied with
by the court and the case posted for trial. Evidence-in-chief is in the judgment of a High Court, a Special Leave Petition (“SLP”) may
the form of sworn affidavits and cross-examination is conducted in be filed to the Supreme Court of India against any such judgment
front of court-appointed commissioners. This is followed by the within a period of 90 days from the date of the impugned judgment
filing of documents and evidence by the claimant and the respondent (Order XXI, Rule 1, Supreme Court Rules, 2013). In case of refusal
respectively. On conclusion of arguments on merits, the court by a High Court to grant a certificate of appeal to prefer a SLP
reserves the matter to pronounce its judgment on a later date. before the Supreme Court, an appeal to the Supreme Court may be
preferred within 60 days of the impugned order of the High Court
India
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 (Order XXI, Supreme Court Rules, 2013).
respondent wherein a judgment is sought without trial. A decision from the court of first instance can be expected within a
Parties may prefer an appeal to a High Court within a period of 90 period of three to four years and within one to two years from the final
days from the date of the impugned judgment of a lower court, or court of appeal.
within a period of 30 days to any other court in India (Division II of
Sumeet Kachwaha Dharmendra Rautray

Kachwaha and Partners Kachwaha and Partners
1/6, Shanti Niketan 1/6, Shanti Niketan
New Delhi – 110021 New Delhi – 110021
India India
Tel: +91 11 4166 1333 Tel: +91 11 4166 1333

Fax: +91 11 2411 0763 Fax: +91 11 2411 0763
Email: skachwaha@kaplegal.com Email: drautray@kaplegal.com
URL: www.kaplegal.com URL: www.kaplegal.com
Sumeet Kachwaha has approximately 39 years’ experience in Dharmendra Rautray completed his LL.M. in 1996 from the London
the legal profession, mainly in corporate and commercial law. Mr. School of Economics and was thereafter called to the England and
Kachwaha has held a Band One ranking in the Arbitration section of Wales Bar in 2001. He is a member of Lincoln’s Inn. He has served
Chambers Asia since 2009. He also features in Who’s Who Legal as faculty for the CLE Programme conducted by the New York City
in the Construction, Arbitration, Procurement, Government Contracts Bar, New York. He successfully argued the Constitution Bench matter
and Asset Recovery sections, and has a Band One ranking in the Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Services Inc.
Dispute Resolution section of the The Legal 500 Asia Pacific. He before the Supreme Court of India.
also features in GAR’s Who’s Who Legal Arbitration Section. He has
Mr. Rautray’s main areas of practice are construction arbitrations,
handled some of the leading and landmark commercial litigations ever
litigation, contracts, business transactions and international trade.
to come up before Indian courts.
Mr. Rautray has authored a full-length book on arbitration published
Mr. Kachwaha has also been involved in the non-contentious side
by Wolters Kluwer (2008) and several articles published in leading
in several high-stake projects, especially in infrastructure, power,
international law journals. He is also a member of the IBA APAG
construction and telecoms. He has advised a wide range of clients
Working Group on Initiatives for harmonising Arbitration Rules and
(on the victims’ side) in relation to business crimes.
Practices.
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.
Kachwaha and Partners is a multi-discipline, full-service law firm having its offices in Delhi and Mumbai (Bombay) and associate lawyers in most
major cities of India. The main office of the firm is in New Delhi, conveniently located next to the diplomatic mission area. It is easily accessible from
all parts of Delhi, as well as its suburbs.
The partners and members of the firm are senior professionals with years of experience behind them. They bring the highest level of professional
service to clients, along with the traditions of the profession, integrity and sound ethical practices.
Members of the firm are in tune with the work-culture of international law firms, as well as the expectations of large corporate clients. The firm has,
amongst its clients, multinationals and leading Indian corporations.

Chapter 13
Indonesia Heru Mardijarto
Makarim & Taira S. Alexandra Gerungan
5. Umbrella/framework
A contract that could be in the form of a unit price contract
for a certain period for services or goods, the volume and/or
1.1 What are the standard types of construction contract period of which has not yet been determined at the time of
in your jurisdiction? Do you have contracts which signing.
place both design and construction obligations Further explanation on the above types of contract will be provided
upon contractors? If so, please describe the types of under the upcoming PR 16/2018’s implementing regulation.
only contract common in your jurisdiction. Do you In addition, the Construction Law sets the minimum provisions
have any arrangement known as management which must be included in a construction contract. For example,
contracting, with one main managing contractor the contract must provide the identities of both parties, a description
and with the construction work done by a series and the value of the work, a force majeure clause, etc. Please see
question 1.5 below for the minimum provisions that need to be
contracts” as an abbreviation for construction and included in a construction contract.
engineering contracts.) Regarding package contractors, in Indonesia it is common to
establish a consortium of several contractors with different areas of
Under Indonesian law, there are no standard types of construction expertise, with the main contractor leading the other members of the
contract. Under Law No. 2 of 2017 on Construction Services (the consortium in performing the work.
“Construction Law”), a construction work contract can take any
form according to need, but must be implemented in accordance 1.2 Are there either any legally essential qualities needed
with the prevailing laws and regulations. In practice, international to create a legally binding contract (e.g. in common
standard forms of contract such as International Federation of law jurisdictions, offer, acceptance, consideration
Consulting Engineers (“FIDIC”) contracts are commonly used with and intention to create legal relations), or any
foreign contractors. specific requirements which need to be included in a
construction contract (e.g. provision for adjudication
It is worth noting that, under Article 27 of Presidential Regulation or any need for the contract to be evidenced in
No. 16 of 2018 (“PR 16/2018”) on Government Procurement of writing)?
Goods or Services, there are several types of contract recognised for
the procurement of construction work: In general, under Article 1320 of the Indonesian Civil Code (“ICC”),
1. Lump sum an agreement is valid if it satisfies the following four requirements:
A contract with a fixed price and scope of work. All the risk (i) the consent of the individuals who are bound thereby; (ii) their
will be borne by the service provider, oriented in the expense capacity to undertake an obligation; (iii) a specific subject matter;
and the payment is based on the progress of the work. and (iv) a permitted cause.
2. Unit price In addition, the Construction Law requires a tender or selection,
A contract to complete all the work within a certain period or electronic procurement to create a legally binding contract for
which is input-based, with a certain unit price for every work construction financed from the state budget or for the construction
element or unit with certain technical specifications, which is of a public facility.
temporary and payment for which is based on the volume of
the result of the work. Usually for this type of contract, the
volume or quantity of works is still an estimation at the time 1.3 In your jurisdiction please identify whether there is
of the signing of the contract. a concept of what is known as a “letter of intent”, in
3. Combination of lump sum and unit price
4. Turnkey enter into a contract later or to commit itself to meet
This is a contract in which prices are fixed until the entire certain costs to be incurred by the contractor whether
works are completed and the payments are made based on or not a full contract is ever concluded.
the results of join evaluation which show that the works have
been conducted in accordance with the agreed criteria. It is common to have a letter of intent or memorandum of
understanding.

Makarim & Taira S. Indonesia
Note that, whilst we have a working knowledge of Indonesian

1.4 Are there any statutory or standard types of insurance taxation laws, this is not an area where we, in common with
which it would be commonplace or compulsory to nearly all Indonesian law firms, claim specialist expertise. In
have in place when carrying out construction work? Indonesia, taxation advisory services traditionally fall within
For example, is there employer’s liability insurance the scope of work of the accounting firms.
injury, or is there a requirement for the contractor to (d) Health and safety
have contractors’ all-risk insurance? The Construction Law imposes requirements related to
Indonesia
construction security, safety and continuity. The employer

Under the Construction Law, a construction contract must include and contractor must comply with the Construction Security,
Safety and Continuity Standards. These standards cover the
a provision on insurance cover to be obtained by the employer/
following areas:
contractor. Under the Indonesian law on social security, the
1. materials;
contractor must enrol its workers in the Manpower Social Security
Program for Construction Workers. In addition to the Manpower 2. equipment;
Social Security Program, the parties are free to determine the types 3. security and safety;
of insurance required for a project. In practice, the employer usually 4. procedures;
requires “Construction All Risk/Erection All Risk” insurance and 5. quality of work;
“Third Party Liability” insurance with both the contractor and the
6. maintenance;
employer as the insured parties.
7. worker protection programmes; and
8. protection of the environment.
to construction contracts in terms of: (a) general The above standards are provided in the relevant regulations.
requirements; (b) labour (i.e. the legal status of those The standards, especially for materials and equipment, may depend
working on site as employees or as self-employed on the type of construction work to be undertaken. For instance,
for the construction of a building (gedung), the Indonesian National
Standards (Standar Nasional Indonesia/SNI) usually apply.
(a) General requirements

Under the Construction Law, the standard clauses to be 1.6 Is the employer legally permitted to retain part of
included in a construction contract are the following: the purchase price for the works as a retention to be
■■ The identities of the parties. are substantially complete; and/or (b) any agreed
■■ The details of the work to be performed, a clear defects liability is complete?
description and scope of work, the value of the work,
unit prices, etc. There is no restriction on the employer retaining part of the payment
■■ Coverage period including a maintenance period for under the construction contract as a form of security, provided that
which the contractor is responsible. it is agreed to by the parties. However, in practice, to secure proper
■■ The rights and obligations of both parties. performance by the contractor, the contractor prefers to provide
■■ Construction workers (including the obligation to the employer bonds (e.g. Advance Payment Security, Performance
employ certified construction workers). Security, Defect Notification Period Security).
■■ The method of payment.
■■ Event of Default provisions. 1.7 Is it permissible/common for there to be performance
■■ Dispute settlement. bonds (provided by banks and others) to guarantee
■■ Termination of contract provisions. guarantee the performance of subsidiary companies?
■■ Force majeure. Are there any restrictions on the nature of such bonds
■■ Building failure. and guarantees?
■■ Workers’ protection (working safety and health).
Yes, it is common in Indonesia for the contractor to provide several
■■ Protection against third parties (including the obligations
of the parties in the event of a loss or accident or death). guarantees/bonds. Note that for a construction project financed out
of the state budget, it is mandatory for the contractor to provide
■■ Environmental aspects (includes the obligation of the
Contractor Bonds.
parties to comply with the environmental requirements).
■■ Collateral or guarantees. The Contractor Bonds must be payable unconditionally in the
amount of the guaranteed value and within a certain period of receipt
(b) Labour
of the request from the employer regarding the contractor’s default.
Article 47(1)e of the Construction Law requires contractors
and the employers to only hire construction workers holding Bank Indonesia Circular Letter No. 23/7/UKU Tahun 1991, dated
a Work Competence Certificate (Sertifikat Kompetensi Kerja) 18 March 1991, requires a Bank Guarantee to contain the following:
in certain positions. According to the elucidation of this 1. Title: “Bank Guarantee”.
Article, these positions are: (i) operators; (ii) technicians or
2. The name and address of the bank issuing the Bank Guarantee.
analysts; and (iii) experts (ahli).
(c) Tax 3. The issuance date of the Bank Guarantee.
Tax issues do not have to be covered in the construction 4. The underlying transaction secured.
contract. Employees in a construction project must pay 5. The amount of money guaranteed.
income tax like all employees. Usually, the contractor who
6. The beginning and end dates of the Bank Guarantee.
hires the workers pays their income tax.
7. The end date for submitting a claim.

8. A statement that bank will pay the beneficiary with the condition is uncommon, the “pay when paid” scheme may be applied in a
that the bank will first confiscate and sell the principal’s assets project as long as it is agreed to by the parties under the construction
(Article 1831 of ICC) or the bank will release its right to first contract.
claim the principal’s assets to be confiscated and sold (Article In project finance, the availability of the funds needed by the
1832 of ICC) and thus immediately pay the beneficiary. As employer to pay the contractor (financial close) is included as
guarantees/bonds for construction are payable unconditionally, a condition precedent to the commencement date under the
the bank usually waive its rights under Article 1831 of ICC.
Indonesia

We understand that this relates to the security placed by the estimate of loss, or can the contractor be bound to
contractors to make sure the employer meets its payment obligations. pay a sum which is wholly unrelated to the amount of
It is common in private projects for the contractor to require its financial loss suffered?
investment to be secured by a lien over collateral. The lien may be
a fiduciary security (for moveable objects, e.g., materials supplied, The parties may agree in advance on a fixed sum (liquidated
etc.). If the construction contract allows the contractor to place a damages) to be paid by the contractor to the employer in the event
lien on the goods and supplies used in the works, the construction of a particular breach (e.g. late completion of the works). Under
contract will usually require the contractor to provide the employer Article 1309 of ICC, Indonesian courts have the authority to reduce
a lien waiver upon the fulfilment of the payment obligation by the the amount of liquidated damages if the contract has been partially
employer. fulfilled. Moreover, Indonesian courts have, on occasion, reduced
In addition, for goods or supplies that are not fixed to the land, the amount of the damages based on considerations of decency and
under Article 1459 of the ICC, ownership of the goods will not be good faith.
transferred if there is no handover from the seller (or in this case
the contractor) to the buyer (or in this case the employer). The
contractor may hold back the handover of the goods until the 3 Common Issues on Construction
contractor has been paid. Contracts
2 Supervising Construction Contracts 3.1 Is the employer entitled to vary the works to be done
2.1 Is it common for construction contracts to be The Construction Law does not give the contractor the right to vary
supervised on behalf of the employer by a third party?
the works without the consent of the employer. It therefore depends
Does any such third party (e.g. an engineer or architect)
have a duty to act impartially between contractor and on the construction contract. In general, any change or alteration
employer? Is that duty absolute or is it only one which must be agreed to by the employer, as it will also usually lead to a
exists in certain situations? If so, please identify when price adjustment.

Yes, it is common for construction contracts to be supervised on omitted, can the employer do it himself or get a third
behalf of the employer by a third party. This duty is not regulated party to do it?
under Indonesian law, but ideally, the third-party supervisor must
act impartially. The Construction Law imposes no restriction on the work that can
In the event of a building failure, for example, an independent be omitted from the contract. However, in Indonesia, a standard
expert evaluator (penilai ahli) will be appointed by the Minister of construction contract (FIDIC) only allows an omission if the
Public Works and Housing (“MOPW”) to impartially evaluate the employer does not need the work, not if the employer will have a
building failure. third party replace the contractor to perform work.
For your information, prior to the usage of building, the employer/
project owner must obtain a certificate of worthiness (sertifikat laik 3.3 Are there terms which will/can be implied into a
fungsi) issued by the local government. To obtain this certificate, construction contract?
usually the local government will appoint a third party to make
assessment on the operational worthiness of such building.
Unless otherwise stated in the construction contract (except for
provisions of Indonesian law that cannot be waived (e.g. the duty to
2.2 Are employers entitled to provide in the contract that act in good faith)), the rights and obligations under the law (statutory
they will pay the contractor when they, the employer, requirements) are deemed implied in a construction contract.
paid” clause?
The Construction Law is silent on this scheme, but Indonesian

law recognises the freedom of contract principle. Although it

However, it is not unusual for the employer and the contractor to

3.4 If the contractor is delayed by two events, one the share the risks, so that in the event of unforeseen ground conditions,
fault of the contractor and one the fault or risk of the parties will agree on how to deal with the issue.
concurrent delay? 3.8 Who usually bears the risk of a change in law
Indonesia
As a general rule, under Article 24 of Government Regulation No.

29 of 2000 (subject to the upcoming implementing regulations for The Construction Law is silent on this issue, so it is agreed between
the Construction Law), the party responsible for the delay must the parties under the construction contract. In practice, this risk is
provide compensation for the costs incurred because of a concurrent usually borne by the employer.
delay. The Construction Law is silent on who is responsible in the
event of concurring causes; it is to be determined on a case-by-case 3.9 Who usually owns the intellectual property in relation
basis taking into account the relevant provisions of the construction to the design and operation of the property?
contract. Unlike in common law systems, Indonesian law does not
set provisions on the laws of causation. The Construction Law is silent on this issue, so it is agreed between
It is important to note that Indonesian courts have wide latitude the parties under the construction contract. Generally speaking,
to interpret law and to make rulings, and do not have to follow those who create the intellectual property material in respect of the
precedent. Each case is therefore decided based on the presiding design and operation of a property typically own the intellectual
court’s interpretation of the law and determination of the facts. property rights related to the project. These are usually the
Case law has little legal effect and only a few cases are published. employer’s design consultants or, if the contractor has created the
Enforcement proceedings are also subject to the general discretion design, the contractor.
of the courts with regard to the award of costs. If the contractor owns the intellectual property, the contractor will
provide an irrevocable right to use the intellectual property to the
3.5 If the contractor has allowed in his programme a employer.
after this float is used up? The Construction Law is silent on this issue, so it is agreed between
the parties under the construction contract. In most cases, the
The Construction Law is silent on this issue, so it is agreed construction contract provides the contractor the right to suspend
between the parties under the construction contract. In general, the works.
entitlement to an extension of time for any reason usually depends
on the agreement between the parties. 3.11 On what grounds can a contract be terminated? Are
3.6 Is there a limit in time beyond which the parties to those termination rights need to be set out expressly?
what date does time start to run? The Construction Law is silent on this matter, so it is agreed between
the parties under the construction contract. The construction contract
will usually include clear provisions on termination of the contract.
Under Article 1967 of the ICC, all legal claims expire after 30
Typically, the employer is entitled to terminate for a default or the
years. However, for a building failure, under the Construction Law,
bankruptcy of the contractor. The contractor can do so in the event
the contractor’s period of liability is determined according to the
of the bankruptcy of the employer or its failure to make payment
anticipated lifetime of the planned construction, specified in the
within a specified period.
construction contract. If the specified term is more than 10 years,
the contractor is liable for building failures occurring during the
interval between the handover and 10 years after the handover. The 3.12 Is the concept of force majeure or frustration known
employer will be liable for any building failure which occurs after in your jurisdiction? What remedy does this give
the specified term.
conditions? Yes, the concept of force majeure is known and commonly used
in Indonesia. For construction contracts, the Construction Law
The Construction Law is silent on this issue, so it depends on the provides two types of force majeure:
arrangement for the construction works agreed to by the parties 1. force majeure of an absolute nature: a situation in which the
under the construction contract. If the employer is responsible parties cannot exercise their rights and obligations under the
for a feasibility study of ground conditions (conducted before construction contract; and
construction commences), and if that information is relied on by the
2. force majeure of a relative nature: a situation in which the
contractor without the contractor having any obligation to verify the parties can still exercise their rights and obligations under the
accuracy of that information, the employer is for unforeseen ground construction contract.
conditions. It is also possible to have the contractor bear the risk of
The parties are free to determine under the construction contract
any unforeseen ground conditions under the construction contract.
which events will trigger a force majeure condition.

3.13 Are parties which are not parties to the contract 3.18 Where the construction contract involves an element
entitled to claim the benefit of any contract right of design and/or the contract is one for design only,
which is made for their benefit? E.g. is the second or are the designer’s obligations absolute or are there
subsequent owner of a building able to claim against limits on the extent of his liability? In particular, does
the original contracts in relation to defects in the the designer have to give an absolute guarantee in
building? respect of his work?
Indonesia
In the event of a building failure, third parties (even the general Insofar as it relates to liability for a defect which leads to a building
public) affected by a building failure may claim compensation for failure, if it is purely caused by the design (assuming that the design
losses/damage caused by the building failure. will not change during construction), the designer may be held liable.
An independent expert evaluator (penilai ahli) will be appointed by
the MOPW to evaluate the building failure and determine who is
owes money to the other (P2) set off against the sums liable for the building failure.
due to P2 the sums P2 owes to P1? Are there any The designer’s period of liability is determined according to the
limits on the rights of set-off? anticipated lifetime of the planned construction, as specified in the
construction contract. If the specified term is more than 10 years,
Set-off arrangements ( perjumpaan utang) are known in Indonesia. the designer is liable for building failures occurring during the
Under Article 1425 of the ICC, if one party is simultaneously a interval between the handover and 10 years after the handover.
creditor and a debtor to another party, the debt can be settled by
“set-off”.
care to each other either in contract or under any 4.1 How are disputes generally resolved?
Under Indonesian law, disputes are commonly resolved out of court
The duty of care principle is more commonly known in common (i.e. arbitration and alternative dispute resolution).
law jurisdictions, not in civil law jurisdictions such as Indonesia. In
Depending on the complexity of the case, court litigation can take
Indonesia, a tort claim may be submitted when one party unlawfully
from six months to approximately one year to obtain a district court
violates another party’s rights thereby causing the other party (the
ruling (first instance) in Indonesia, and the losing party can appeal
aggrieved party) to suffer damages which the aggrieved party
to the relevant high court. High court proceedings can take another
may claim. A tort/illegal act lawsuit does not require any prior
six months, and the losing party can appeal to the Supreme Court,
contractual arrangement as it is covered by the law. To qualify as an
which can take from one to three years to render a final decision.
illegal act, the following four criteria must be met:
Indonesian judges are not bound by earlier judgments as Indonesian
1. There must have been an illegal act (onrechmatig). law does not recognise binding precedent principles. As such, each
2. The illegal act must have caused the relevant third party to case before the Indonesian courts is determined on the basis of its
suffer a loss. particular facts and merits.
3. There must have been a “mistake” or “negligence”. The parties may agree to proceed to arbitration either before or
4. There must be a direct relationship between the act and the during a dispute. An arbitration agreement will preclude the parties
loss. from submitting the dispute to court. Indeed, it is specifically stated
that the court must refuse to be involved in a dispute where the
parties have stipulated arbitration. In addition to arbitration, Law
3.16 Where the terms of a construction contract are No. 30 of 1999 on Arbitration and Alternative Dispute Resolution
(“Arbitration Law”) also provides alternative dispute resolution to
settle disputes or divergent views throughout the court as agreed
upon by parties, namely by means of consultation, negotiation,
Under Article 1343 of the ICC, if the wording of an agreement is
mediation, conciliation or evaluation experts.
open to several interpretations/ambiguous, then the intent of the
parties involved must be ascertained rather than the literal sense of
the wording. 4.2 Do you have adjudication processes in your
Under the Construction Law, in the event of a dispute, the Indonesian procedures.
language version of the construction contract must apply.
While adjudication is common to settle construction disputes,
3.17 Are there any terms in a construction contract which Indonesian Arbitration Law does not specify it as a dispute
are unenforceable? settlement alternative. Law No. 2 of 2017 on Construction
Services (the new Indonesian Construction Law) provides for a
In general, terms that conflict with the law terms are unenforceable. Dispute Board (Dewan Sengketa), which is a team formed under
One example is the provision on the prevailing language of the the parties’ agreement to prevent and mediate a dispute arising
construction contract. Under the Construction Law, the Indonesian from the implementation of the construction contract. This will
version of the construction contract must prevail. Therefore, be specified further in a government regulation, but to date, the
a provision in a construction contract that states that the English government regulation has not yet been issued. We are aware
version of the agreement prevails may not be recognised. that a Dispute Adjudication Board (“DAB”) is available in FIDIC
contracts.

has been registered in the Central Jakarta District Court, if the

4.3 Do your construction contracts commonly have respondent does not implement the award voluntarily, the steps to
arbitration clauses? If so, please explain how enforce the award are as follows:
1. file a petition for a writ of execution (exequatur) – the Central
Jakarta District Court will then issue an Exequatur Order
Yes, our construction contracts commonly have arbitration clauses.
(Penetapan Exequatur);
As explained above, under the contract, the parties may agree to
Indonesia
arbitration before or during a dispute. 2. file a petition to summon the respondent to appear in court to
be officially warned (aanmaning) to implement the award and
The parties to the arbitration are given wide discretion to determine
the Exequatur Order; and
their own procedural provisions and processes, provided they do not
conflict with the Arbitration Law. Some of the principles provided 3. file a petition to seize the respondent’s assets and sell them
in the Law are as follows. through public auction if the respondent denies or refuses
to comply with the court’s demand as explained above for
■■ Secrecy: the arbitration is conducted behind closed doors.
whatever reasons.
■■ Language: Indonesian, unless the parties and the arbitrator
agree otherwise. The above procedures are subject to Indonesian Civil Procedure
Law.
■■ Representation: proxies may represent the parties provided
they are properly authorised. Third parties can participate in The award can be recognised and may only be enforced within an
the arbitration if they have interests in the case and with the Indonesian jurisdiction if they satisfy the following requirements:
agreement of all parties and the arbitrator. 1. the award must have been rendered by an arbitrator/tribunal in a
■■ Provisional Decision: this is possible if a party applies for country which, together with Indonesia, is a party to a bilateral
it; for example, an order to sell perishable goods. The exact or multilateral treaty on the recognition and enforcement of
scope and extent of such interim judgments are unclear. international arbitral awards;
■■ Forum: arbitration can be ad hoc or institutional, either 2. international awards are limited to awards which, under
domestic or international. the provisions of Indonesian law, fall within the scope of
■■ Venue: to be determined by the parties or the arbitrator; commercial law;
however, certain functions (for example, site inspection or
3. the awards do not violate public policy; and
witness examination) can be held elsewhere.
4. an Exequatur Order from the Chairman of the Central Jakarta
■■ Witnesses: witnesses, including expert witnesses, may be
summoned either at the request of the parties or the order of District Court has been obtained.
the arbitrator. Enforcement of international arbitral awards may be challenged in
■■ Secretary: a secretary should prepare an account of the the following ways:
arbitration and its proceedings. 1. Appeal to the Supreme Court. The appeal can be filed only
So far as the arbitral process itself is concerned, the basic procedures against a decision of the Chairman of the Central Jakarta
include the claimant’s petition, the respondent’s response/ District Court that refuses to recognise and enforce the award.
counterclaim, hearing, evidence review and award. The review of The Supreme Court will rule within 90 days of receipt of the
the dispute must conclude within 180 days of the arbitrator/tribunal appeal case. A decision of the Chairman of the Central Jakarta
being instituted. This period may be extended; often, the parties District Court confirming and enforcing the award cannot be
may wish to waive the provisions of this article in their arbitration appealed.
clauses or agreement. 2. Annulment. Under article V(1)(e) of the New York
Convention, annulment of the award may only be requested in
the place where the arbitration was held.
arbitration, do your jurisdiction’s courts recognise
and enforce international arbitration awards? Please 4.5 Where the contract provides for court proceedings
advise of any obstacles to enforcement. in a foreign country, will the judgment of that foreign
Yes, enforcement of an international arbitral award can be applied
after the award has been registered at the Central Jakarta District Under Article 436 of the RV (Reglement of de Rechtsvordering –
Court by the arbitrator(s) or their proxy. When registering the an Indonesian civil procedural regulation from the colonial era), a
award, the following documents must be provided: foreign court judgment cannot be enforced in Indonesia directly. To
1. the original award, or its authenticated copy according to enforce one, a new lawsuit must be filed in an Indonesian court.
the provisions on the authentication of foreign documents, The foreign court ruling may be introduced as evidence in the new
together with an official Indonesian translation; proceedings, although in principle the Indonesian court will not be
bound by the findings of the foreign court. The basic procedure will
2. the original agreement which is the basis for the award follow the civil procedural law as explained in question 4.6 below.
or its authenticated copy according to the provisions on
the authentication of foreign documents, together with an
Indonesian official translation; and 4.6 Where a contract provides for court proceedings in
3. a certificate from the diplomatic representative of the Republic any rights of appeal and a general assessment of
of Indonesia in the country in which the award was rendered, how long proceedings are likely to take to reduce: (a)
stating that country and Indonesia are bound by a bilateral or a decision by the court of first jurisdiction; and (b) a
multilateral treaty on the recognition and implementation of decision by the final court of appeal.
international arbitral awards.
Upon receipt of the above documents, the Central Jakarta District Civil disputes in Indonesia are filed in general courts, comprising
Court will issue a deed of registration of the award. Once the award district courts serving as courts of first instance and high courts

as courts of appeal. The Supreme Court supervises the district case by submitting an application within 14 days of receiving the
courts and high courts, and is the court of final appeal. Therefore, district court’s ruling. It is not mandatory, but the appellant can
Indonesia generally adopts a three-stage court system (exceptions submit a memorandum of appeal, which sets out the reasons for the
include appeals against commercial court judgments on bankruptcy appeal. The court will take six months to one year to hand down a
an intellectual property, and Industrial Relations Courts, which lie ruling. The enforcement of the original district court judgment is
directly with the Supreme Court). generally stayed until a final and binding ruling is handed down.
(c) Appeal to the Supreme Court
Indonesia
(a) The court of first instance
Generally, the process is as follows: (i) the plaintiff registers a The unsuccessful party may appeal against the high court judgment
lawsuit with the district court’s clerk’s office; (ii) the court then to the Supreme Court. Appeals on certain cases (such as commercial
serves the defendant an order to appear in court on the first hearing; court rulings on bankruptcy and intellectual property) lie directly
and (iii) on the first hearing, the judge refers the parties to the with the Supreme Court. In general, the appellant must state its
mandatory mediation. If mediation fails, the mediator returns the intention to appeal within 14 days of receiving the high court
matter to the judge. ruling. The appellant must submit a memorandum of appeal setting
out the grounds for the appeal within 14 days of the application’s
Subsequently, the defendant can submit a response to the plaintiff’s
submission. The respondent can file a counter appeal memorandum
claim. The plaintiff is given an opportunity to submit a rejoinder
within 14 days of receipt of the appeal memorandum. The Supreme
responding to the defendant’s response, and the defendant is given
Court in general decides on matters of law only. Enforcement of the
an opportunity to respond to it in a counterplea. The judge will
high court ruling is generally stayed until a final and binding ruling
then allow the disputing parties to present evidence, including, if so
has been handed down by the Supreme Court. It can take from one
desired, witnesses or experts. Finally, each party can submit their
to five years to render a final decision.
closing arguments; thereafter, the court renders its final ruling and
(d) Judicial review in the Supreme Court
reads it out in the final hearing.
Under Indonesian law, a judicial review of a final and binding court
A 2014 Supreme Court Circular Letter requires trials in courts of
judgment (including of the Supreme Court) is only available in
first instance to conclude within five months of the lawsuit being
limited circumstances, including if the judgment was based on false
registered. However, in practice, a civil court proceeding (in the
information or a deception by the opposing party, which was only
first instance) often takes longer than five months.
discovered after the case had been ruled on and after the judgment
(b) Appeal to the high court was handed down, or if substantial written evidence was discovered
The unsuccessful party has an absolute right to appeal against a that could not be found during the proceedings. The judicial review
district court judgment to the high court. The appellant must submit does not cancel or prevent enforcement of a final and binding
an appeal to the clerk of the district court with jurisdiction over the judgment while the judicial review is being considered.

Heru Mardijarto Alexandra Gerungan

Makarim & Taira S. Makarim & Taira S.
Summitmas I, 16th & 17th Floors Summitmas I, 16th & 17th Floors
Jl. Jend. Sudirman Kav. 61–62 Jl. Jend. Sudirman Kav. 61–62
Jakarta 12190 Jakarta 12190
Indonesia Indonesia
Indonesia
Tel: +62 21 252 1272 / +62 21 520 0001 Tel: +62 21 252 1272 / +62 21 520 0001
Fax: +62 21 252 2720 / +62 21 252 2751 Fax: +62 21 252 2720 / +62 21 252 2751
Email: heru.mardijarto@makarim.com Email: alexandra.gerungan@makarim.com
URL: www.makarim.com URL: www.makarim.com
Heru Mardijarto is a Partner in the firm’s Corporate and Commercial Alexandra Gerungan is a Partner dealing with litigation/dispute
department. His expertise includes general corporate matters, energy resolution at Makarim & Taira S. She has successfully handled litigation
and natural resources, construction, and IT and telecommunications. and dispute resolution cases across highly diverse sectors.
He has advised many major international clients as well as
Her experience ranges from civil lawsuits to: arbitration; alternative
Indonesian state-owned companies in relation to power plants as
dispute resolution; anti-corruption investigation; employment issues;
well as construction projects. He also has extensive experience in
land/property cases; insurance, banking and future exchange claims/
handling the procurement/tender process in both government and
disputes; police investigations (for example, related to allegations
private institutions. Specifically for construction projects, he has been
of forestry and environmental crimes); and internal/independent
involved in some big construction projects for electric power plants, a
investigations. She also advises on related matters such as due
blast furnace, and the construction of the Grissik–Singapore borderline
diligence and general investigations, liquidation, bankruptcy/suspension
gas pipeline. Recently, he has been actively involved in handling data
of payment, and land/property issues.
protection legal issues and provided advice on them to both local and
overseas clients. Drawing on her experience, she is moreover able to advise clients on
transaction structures, agreements and general business practices with
a view to preventing the emergence of future disputes or issues.
Alexandra is a frequent contributor to and a co-author of various reports,
articles and publications on litigation, arbitration, alternate dispute
resolution, environment matters, rule of law, compliance issues and
labour law. Her articles have appeared internationally in publications by
Law Business Research, Global Legal Group and World Justice Project.
She has also been invited as a speaker for seminars and workshops
on litigation, arbitration, dispute settlement alternatives and insolvency.
Established in 1980 by two Harvard graduates, Nono Anwar Makarim and Frank Taira Supit, Makarim & Taira S. (M&T) is a leading business law firm
in Indonesia offering a full range of corporate, banking, litigation and specialist legal services to national and international clients.
Over the years, the firm has formed strong and lasting relationships with a large number of clients and businesses. We pride ourselves on the loyalty
of our clients and attempt to provide to each client the same unvarying standard of service. The firm also has unique and unsurpassed experience
and insight into many aspects of Indonesia’s business and governmental spheres and has the necessary expertise to assist our clients in their
Indonesian investments and transactions.
M&T is also favoured as Indonesian counsel by a growing number of leading international law firms and has significant expertise in acting as
local counsel in international and multinational transactions. Our existing connections both in Indonesia and overseas allow us to ensure the firm
maintains and develops its expertise and is able to assimilate the most up-to-date drafting and other legal techniques and knowledge.

Chapter 14
Ireland
Matheson Rhona Henry
building works and civil engineering works), site investigation

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

Matheson Ireland
the contractor to begin preliminary contract work (e.g., begin site 2. Data Protection Acts 1988 to 2003: these acts outline
clearance and site preparation, and the ordering of equipment) obligations regarding the type of data an employer
before the parties execute a final contract. may hold on employees, the background checks that an
employer can carry out on potential employees, seeking
Garda vetting of potential employees and how long an
1.4 Are there any statutory or standard types of insurance organisation can retain employee data.
which it would be commonplace or compulsory to 3. The Minimum Wage Act 2000: provides for a national
have in place when carrying out construction work? minimum wage per hour for an adult employee which is
Ireland
For example, is there employer’s liability insurance €9.55 per hour. In the construction sector, employers usually
pay at a higher rate as a matter of sector-level practice.
have contractors’ all-risk insurance? 4. Sectoral Employment Order (Construction Sector) 2017
(SI 455) (“SEO CS”): this came into force on 19 October
2017 pursuant to the Industrial Relations (Amendment)
Irish statute law does not require specific insurances in relation Act 2015. The SEO provides for statutory minimum pay
to construction projects, save for motor vehicle insurance where (varying depending on the type and skill of the worker),
appropriate. However, construction projects will typically involve unsocial hours premiums, pension, death in service benefit
some/all of the following insurances: and sick pay entitlements for craftsmen, construction
(a) insurance of the project works (typically referred to as “All operatives and apprentices who are employed in the
Risks” insurance), taken out by either the contractor or the construction sector.
employer to cover loss or damage to the works and/or project 5. Sectoral Employment Order (Mechanical Engineering
materials; Building Services Contracting Sector) 2018 (SI 59) (“SEO
ME”): this came into force on 6 March 2018 pursuant to the
(b) employer’s liability insurance, taken out by the contractor to
2015 Act and applies to certain workers in the mechanical
cover injury to or the death of its employees during the course
engineering building services sector, which will include,
of a construction project;
but is not limited to, qualified plumbers and pipefitters,
(c) public liability insurance, taken out by the contractor to and registered apprentice plumbers and pipefitters. The
cover third-party claims in relation to personal injury, death SEO ME is sufficiently wide in scope so that it will also
or injury to third parties and property damage (other than cover those employed through an employment agency.
damage to the works); and Like the SEO CS, the SEO ME also provides for statutory
(d) professional indemnity (“PI”) insurance, taken out by any minimum pay and minimum pension entitlements.
party with design responsibility to cover design liability. 6. The Industrial Relations Acts 1942 to 2015: this legislation
provides the overall industrial relations framework for
resolving industrial disputes in Ireland. It is based on a
1.5 Are there any statutory requirements in relation predominantly voluntarist system, the central feature
of which is that an employer cannot be required to
recognise a trade union or to negotiate directly with it.
The recommendations from the Workplace Relations
Commission or the Labour Court are in most cases non-
binding; however, in certain circumstances the Labour
Court can issue binding orders in relation to terms and
(a) General Requirements conditions.
The Construction Contracts Act 2013 (the “CCA”) applies to 7. The Organisation of Working Time Act 1997: regulates
all construction contracts (as defined under the CCA) entered working time, annual leave and public holiday leave.
into after 25 July 2016. The CCA applies to oral and written It provides for a maximum working week of 48 hours
agreements. The CCA: averaged over a four-month period (or in certain cases
1. introduces requirements in relation to payment under a longer averaging periods), daily and weekly rest periods,
construction contract; and minimum annual leave entitlements.
2. renders “ineffective” “pay when paid” clauses in 8. The Protected Disclosures Act 2014: this is the Irish
construction contracts; and general whistleblower code and allows employees to raise
concerns regarding potential health and safety issues at
3. provides for an adjudication regime in relation to payment the workplace and failure of the employer to comply with
disputes under construction contracts. legal obligations, amongst other issues.
The Building Control (Amendment) Regulations 2014 9. The Protection of Employees (Part-Time Work) Act 2001:
also introduced a new regime in this jurisdiction aimed at in addition to providing protection to part-time employees
achieving minimum standards in building practice in relation against less favourable treatment, this legislation
to design and construction methods. implements the EU-posted workers directive, imposing
(b) Labour certain minimum mandatory standards under local law to
The following principal legislation relating to labour must any employees working in the jurisdiction, irrespective of
be taken into account when drafting construction contracts nationality, where they were originally hired or the place of
in Ireland; however, there is a large body of broader residence. In short, this prevents foreign service providers
employment law that will also apply depending on the issue using foreign labour on more cost-effective terms and
and circumstances: conditions to undercut local service providers.
1. The Employment Equality Acts 1998 to 2015: these acts 10. The Protection of Employees (Transfer of Undertakings)
deal with employment discrimination on the grounds Regulations 2003: the rules (“known as TUPE”) provide
that where a business or part of a business transfers from
of gender, civil status, family status, sexual orientation,
one employer to another, any employees attached to that
religion, age, disability, race and membership of the
business will be entitled to transfer with it on the same
traveller community. They also regulate issues such as
terms and conditions, and with their service recognised in
harassment, sexual harassment, discriminatory dismissal,
full. Changes or dismissals related to the transfer are not
victimisation, access to employment, equal pay and
permitted, though redundancies are.
working conditions.

Matheson Ireland
11. Paternity Leave and Benefits Act 2016: this allows the The following are some examples of an employer’s
“relevant parent” to take a two-week period of leave at obligations in relation to a construction project under Irish
any time between the date of birth or the placement of a health and safety legislation:
baby/child (if adopted) and in any event a date not later 1. An employer must satisfy itself that the contractor to
than 26 weeks after such date. This is protected leave. An be appointed to the project has demonstrated that it is
employer is not obligated to pay an employee who is on competent to complete the project works.
paternity leave, and in any event the employee can claim a 2. An employer must appoint, in writing, a competent
paternity benefit for the two-week period, which is on par
Ireland
Project Supervisor Design Process (“PSDP”) and
with similar benefits such as maternity benefit amounting a competent Project Supervisor Construction Stage
to €230 per week, subject to the employee having made (“PSCS”) to discharge an employer’s obligations related
appropriate PRSI contributions. to the respective design and construction of the works.
12. EU legislation such as the Equal Pay Directive, the Equal 3. An employer must maintain a safety file in relation to each
Treatment Directive and the General Framework Directive construction project it undertakes, containing relevant
must also be considered when drafting construction health and safety information.
contracts.
4. If the duration of a construction project is expected to
(c) Tax exceed specified limits (e.g., last longer than thirty (30)
Subject to limited exceptions, workers on a construction project working days), an employer must give written notice to
(like all employed/self-employed persons working in Ireland), the Health & Safety Authority of the particulars of the
are generally subject to the payment of income tax, universal respective PSDP and PSCS appointments.
social charge (“USC”) and pay-related social insurance
(“PRSI”) either through self-assessment as self-employed 1.6 Is the employer legally permitted to retain part of
persons or through the pay-as-you-earn or PAYE system. the purchase price for the works as a retention to be
In the case of employees, the employer needs to correctly released either in whole or in part when: (a) the works
operate the PAYE system of withholding tax and be mindful are substantially complete; and/or (b) any agreed
of its obligations and its filing requirements in this regard. In defects liability is complete?
the case of individuals engaged as independent contractors,
the contracting entity needs to be entirely satisfied that they
Standard-form construction contracts in this jurisdiction provide
are genuine independent contractors from an Irish tax, social
for an agreed percentage of the contract sum to be retained by
security and employment law perspective. The classification
of workers as independent contractors rather than employees is the employer for the purposes of remedying defects. The typical
a risk area frequently audited by Irish Revenue. retention amounts are between 3% and 10%. Usually, the contractor
will invoice the employer for half of the amount of the contract sum
Furthermore, Relevant Contracts Tax (“RCT”) must be
retained upon issue of the certificate of substantial completion. The
operated by a party who falls under the definition of a principal
contractor. In order to operate RCT, the principal contractor balance of the retention monies is invoiced upon the issue of the
must register for RCT purposes and through the Revenue defects certificate/final certificate. In standard-form construction
Online System (“ROS”) register all relevant contracts under contracts, such as the RIAI and GCCC, the retention money is held
which it has engaged sub-contractors involved in the project in trust by the employer for the contractor.
and notify Revenue in advance of any payments to be made
to the sub-contractors. This system allows the Revenue to
require sums of money to be withheld for tax purposes from bonds (provided by banks and others) to guarantee
the sub-contractor each time the principal contractor makes performance, and/or company guarantees provided to
a payment and the withheld amount is required to be paid to guarantee the performance of subsidiary companies?
the Revenue by the principal contractor. Revenue imposes Are there any restrictions on the nature of such bonds
heavy penalties for those who do not register and fail to and guarantees?
operate RCT. The purpose of the system is to ensure that
sub-contractors satisfy their tax obligations on time as the
Performance bonds and parent company guarantees are permissible
withheld amounts may be offset by the Revenue on behalf of
and commonly seen in construction projects in this jurisdiction.
the sub-contractor against any tax liabilities they may have.
They are not mutually exclusive and regularly both kinds of contract
It should also be noted that where RCT applies, it can alter
the application of VAT to the relevant contract as well. security are sought by employers. Performance bonds usually
involve an employer, a contractor and an independent third party such
(d) Health and Safety
as a bank or a financial institution, which guarantees to cover certain
The following key pieces of health and safety legislation losses sustained by the employer due to the non-performance by the
affect the construction industry in this jurisdiction: contractor. The amount of the bond is usually between 10% and
■ Safety, Health and Welfare at Work Act 2005. 12.5% of the contract sum. In contrast, a parent company guarantee
■ Safety, Health and Welfare at Work (Construction) will come directly from the parent company, where the contractor is
Regulations 2013. a subsidiary of the parent company, and will cover the entirety of the
■ Safety, Health and Welfare at Work (Asbestos) Regulations works. Company guarantees are often capped at the contract sum.
2006 to 2010 and the Safety, Health and Welfare at Work On-demand bonds are very difficult to obtain in Ireland.
(Carcinogens) (Amendment) Regulations 2015.
■ Safety, Health and Welfare at Work (General Application) 1.8 Is it possible and/or usual for contractors to have
Regulations 2007 to 2012. retention of title rights in relation to goods and
The above regulations set out obligations and duties to ensure supplies used in the works? Is it permissible for
a minimum standard of health and safety in the workplace, contractors to claim that until they have been paid
and specify certain equipment and procedures to minimise they retain title and the right to remove goods and
risk. Failure to discharge the statutory duties within the materials supplied from the site?
legislation can have huge implications ranging from a €3
million fine and/or up to two years’ imprisonment. Retention of title (“ROT”) clauses are permissible in construction-
related contractual agreements in Ireland.

Matheson Ireland
In general, a ROT clause will be effective in reserving title to goods

already supplied to an employer so long as the goods exist in the 2.3 Are the parties permitted to agree in advance a fixed
same state in which they were supplied and so long as the goods
have not either been mixed with other similar goods, transmuted particular breaches, e.g. liquidated damages for late
into a manufactured product or affixed to real property (i.e., land completion? If such arrangements are permitted, are
or buildings). there any restrictions on what can be agreed? E.g.
The RIAI form of contract provides that title to goods will pass on does the sum to be paid have to be a genuine pre-
Ireland

payment. pay a sum which is wholly unrelated to the amount of
As each ROT clause will be considered and interpreted on its own financial loss suffered?
terms, it is important to note the specific circumstances around each
contractual arrangement are important in each individual case. Liquidated damages are commonly seen in construction contracts.
The employer and the contractor are permitted to agree a contractual
rate of damages which will cover particular breaches, e.g., damages
2 Supervising Construction Contracts for late completion. Liquidated damages can be expressed in a single
sum but it is more common to specify a daily or weekly rate. The
2.1 Is it common for construction contracts to be contractual rate of those damages must be a genuine pre-estimate
supervised on behalf of the employer by a third of the employer’s loss at the time of entering into the contract. It is
party? Does any such third party (e.g. an engineer invalid and unenforceable if what it stipulates is a penalty. Whether
or architect) have a duty to act impartially between a provision is a penalty will be a matter for the courts to interpret
contractor and employer? Is that duty absolute or is according to the circumstances existing at the time the contract was
it only one which exists in certain situations? If so, made. If a court finds that a clause in a contract is a penalty clause, it
please identify when the architect/engineer must act will not enforce it. In Durkan Homes v Minister for the Environment
impartially.
Heritage & Local Government [2012] IEHC 265, it was held that a
clause prescribing weekly rates of liquidated damages amounted to
Construction contracts in Ireland are commonly supervised and a penalty as the accumulated figures far exceeded the value of the
administered by either an architect/engineer, or another contract property which was affected by the financial crash.
administrator (appointed separately by an employer). Examples of
circumstances of where such a contract administrator has a duty to
act impartially are as follows: 3 Common Issues on Construction
(a) In the event of dispute: if the contractor is disputing an Contracts
architect/engineer’s decision for, e.g., putting extra expenses
on the contractor, then the architect/engineer must decide on
the merits of the contractor’s claim, and in so doing must act 3.1 Is the employer entitled to vary the works to be done
fairly and impartially between the parties. under the contract? Is there any limit on that right?
(b) Payment and issue of certificates: the architect/engineer must

act impartially when deciding how much the contractor is Unless there is an express provision in the contract, variations are
entitled to receive by way of payment. The employer must not allowed in construction contracts under common law. Clause 13
not interfere with the architect/engineer’s role of issuing in the RIAI contract gives the employer the right to order variations
certificates. through the architect. Most construction contracts in this jurisdiction
(c) Extensions of time for completion: the contractor will contain detailed variation provisions. The architect is responsible
normally look for an extension when he is delayed due to a for valuing the variations and recording them without undue delay.
cause which he believes entitles him to an extension of time The contractor is then entitled to prompt payment for variations
under the contract. In deciding whether the cause of the delay properly authorised and carried out. If a proposed variation is
was such as to entitle the contractor to an extension of time, outside the scope of what was anticipated by the contractor and the
the architect/engineer must act impartially. employer, it may fall outside the scope of the power of the employer
to order a variation.
they will pay the contractor when they, the employer, 3.2 Can work be omitted from the contract? If it is
have themselves been paid; i.e. can the employer omitted, can the employer do it himself or get a third
include in the contract what is known as a “pay when party to do it?
paid” clause?
The employer is not entitled to omit work and have it performed
The Construction Contracts Act 2013 (“CCA”), section 3, renders by another contractor, unless there is an express power in the
“ineffective” so-called “pay when paid” clauses except in the limited contract. If work is omitted, the contractor would usually
circumstances provided for under the CCA such as, for example, have to be compensated on a quantum meruit or “as much as he
where a party to a construction contract is in either a bankruptcy or deserves” basis. The contractor would have to provide evidence
an insolvency process (as appropriate). of the expenses incurred as a result of the omission and may also
be awarded compensation for the loss of anticipated profit and for
under-productive use of overheads as a result of reduced workload.

In addition to the express terms of a construction contract, there may

be other terms, known as “implied terms”, which form part of the

Matheson Ireland
contract also. Implied terms may come from one or more sources,
including: custom; Judges’ decisions; and statute law. There are 3.5 If the contractor has allowed in his programme a
numerous statutes which affect terms in construction contracts, in period of time (known as the float) to allow for his own
particular, the Sale of Goods and Supply of Services Acts 1893– example, a variation, is the contractor subsequently
1980, Construction Contracts Act 2013, consumer legislation entitled to an extension of time if he is then delayed
and employment legislation. Some terms which can be implied after this float is used up?
into construction contracts include an implied fitness for purpose
Ireland
warranty, duty to exercise reasonable skill and care, a warranty In a construction context, the term float is generally used to refer
that materials supplied will be of good and proper quality and an to the unallocated time between the finish of the last planned
obligation to carry out work in a good and workmanlike manner. activity under a construction contract and the date for completion.
At common law, neither the contractor nor the employer “own”
3.4 If the contractor is delayed by two events, one the the float in the absence of express agreement to the contrary. In
fault of the contractor and one the fault or risk of practice, the question “who ‘owns’ the float?” tends to be decided
his employer, is the contractor entitled to: (a) an by examining whether or not the contractor has allowed more time
extension of time; or (b) the costs occasioned by that in its programme for the series of contract activities that is longer
concurrent delay?
than these series of activities will, in fact, take to complete. If the
contractor has done so and if the employer wishes to take advantage
Concurrency describes an effect caused by at least two events of this unallocated time (i.e., to propose a change/variation that
occurring at the same time, of which one is at the contractor’s absorbs the float), the question “who ‘owns’ the float?” becomes
risk and one is at the employer’s risk. In the construction contract an examination of whether the employer is entitled to make use of
context, concurrency is often used by the employer as a defence the float at no cost. Conversely, the float can also be looked at as
to a claim for compensation. A claim for compensation based on a consequence – i.e., insofar as a delay to the contract programme
concurrent delay in Ireland will most likely be determined, at least causes disruption to the contractor, and consequential loss and/
at first, by reference to the express extension of time clause in the or expense result in the “float” being absorbed, can the contractor
construction contract (if any). claim an entitlement to an extension of time and/or compensation
The dominant approach to the issue of concurrent delay in England for the consequential loss/expense it actually suffers as a result of
and Wales is that the contractor is entitled to a full extension of time this delay/disruption?
caused by the two or more events, regardless of the contractor’s own The argument in favour of the employer “owning” the float is,
fault. This approach was set out in Henry Boot Construction (UK) at a high level, that the employer has paid for the contractor’s
Limited v Malmaison Hotel (Manchester) Limited [1999] 70 Con programme as the employer has agreed to pay the contractor’s
LR 32 (“Malmaison”) where it was common ground between the cost of programming the works and the contractor’s costs during
parties that: the duration of the contract period and, therefore, the employer
“...if there are two concurrent causes of delay, one of which has contracted to buy the float and so can use it as it wishes.
is a relevant event, and the other is not, then the contractor is Conversely, the argument in favour of the contractor “owning” the
entitled to an extension of time for the period of delay caused float is premised on the fact that the contractor’s costs and profit for
by the relevant event notwithstanding the concurrent effect of a project are influenced by the efficiency with which its resources
the other event.”
are applied and the duration over which they are planned to be
The approach in Malmaison was approved of more recently in the executed.
case of Adyard Abu Dhabi v SD Marine Services [2011] EWHC
Irish law on who “owns” the float is not clear where a construction
848 (Comm) (“Adyard”). There, the alternative approach that, in
contract does not expressly provide for “ownership” of the float.
such circumstances, the contractor is entitled only to a reasonably
Frequently, construction contracts in this jurisdiction do not
apportioned extension of time (as set out in the Scottish case of
specifically deal with ownership of the float.
City Inn Limited v Shepherd Construction Limited [2010] BLR
473 (“City Inn”)) was discussed. In Adyard, however, Mr. Justice
Akenhead confirmed that the Malmaison approach was the correct 3.6 Is there a limit in time beyond which the parties to
approach to take in English law jurisdictions. The Irish courts are a construction contract may no longer bring claims
certainly likely to have regard to this decision.
The general rule in relation to recovery of costs, set out in e Beers
v MTDS Origin IT Services UK (2011) BCR 274, is that in the event Generally, the time limits for bringing a claim under a construction
of concurrent delay the contractor will normally be entitled to an contract are governed by the Statute of Limitations Act 1957 (the
extension of time but not entitled to recover costs. This was affirmed “Act”) (save to the extent that a construction contract specifically
in Walter Lilly & Co Ltd v Mackay & Anor [2012] EWHC 1772 provides otherwise). If the contract is signed by hand, the parties have
(TCC). six years to bring the claim from the date of accrual of the action, and
The public works contracts published by the Government Contracts if the contract is a deed, the parties have 12 years. If the parties are
Committee for Construction (“GCCC”) for use in all public bringing a claim in tort, they have six years from the date on which the
sector construction projects expressly provide that in the event of incident occurred. Recent case law in Ireland has discussed the issue
concurrent delay, the contractor will not be entitled to claim for any of when the cause of action accrues. In Brandley v Deane [2017] (SC,
costs. Unreported), Mr Justice McKechnie set out that the limitation period
runs from when the damage (not the defect) becomes “manifest” –
i.e., capable of being discovered by a plaintiff. This decision affirms
the judicial approach whereby defective work and resultant damages
are distinguished in determining limitation periods.

Matheson Ireland
3.7 Who normally bears the risk of unforeseen ground 3.11 On what grounds can a contract be terminated? Are
conditions? there any grounds which automatically or usually
Normally, the unforeseen ground conditions risk lies with the
expressly?
contractor; however, it is important when negotiating a construction
contract to ensure that risks are placed with the party who is best
There are a number of non-contractual rights to terminate a
Ireland
able to manage them.

construction contract. The parties can terminate a contract if
The RIAI form of contract does not include a clause on unforeseen there are circumstances beyond the parties’ control making the
ground conditions. It is not unusual for the parties to provide a performance of the contract impossible (frustration). A contract
clause in a schedule of amendments to the RIAI, which would allow can also be terminated if a serious or repudiatory breach occurs.
the contractor an extension of time if particular unforeseeable events However, most of the standard-form construction contracts do
occur, such as the presence of archaeological remains or discovery not depend on common law for termination purposes and contain
of utilities. However, if the contract is silent, the risk will pass termination rights for parties. The parties usually set a list of events,
entirely onto the contractor. such as breach, force majeure, insolvency or non-payment, under
Like the RIAI, the JCT does not generally provide for unforeseen which the contract may be terminated. Termination for convenience
ground conditions. wording can be inserted into a contract which allows one party to
In the GCCC form of Civil Engineering Contract used for Public end the contract without having to establish that some event has
Works, there is an option for an employer to take some risk regarding occurred, but such clauses are difficult to negotiate.
the unforeseen ground conditions.
Under FIDIC’s red and yellow books, the employer bears the 3.12 Is the concept of force majeure or frustration known
risk of physical conditions which could not have been reasonably in your jurisdiction? What remedy does this give
foreseeable by an experienced contractor at the date of tender the injured party? Is it usual/possible to argue
(clause 4.12).
3.8 Who usually bears the risk of a change in law Force majeure clauses exist to exclude liability where exceptional,
unforeseen events beyond a party’s control prevent the performance
of its contractual obligations. Force majeure events within a
The contractor is responsible for completing the works in accordance construction contract generally include acts of God, earthquake,
with the local law and regulations and carries the risk in the contract fire, flood or other natural physical disasters, acts of war and riot.
arising from a change in law, including in relation to the contract As there is no doctrine of force majeure in Irish law, it is at the
price. If the contractor does not want to carry the risk, he must contractual parties’ discretion whether they wish to rely upon force
ensure that provisions are expressly incorporated into the contract majeure and can do so by including a provision in their contract.
to deal with this event.
Force majeure may result in an automatic termination of the
contract or by a party giving notice of the termination. However,
3.9 Who usually owns the intellectual property in relation the relevant event must have an adverse impact upon performance
to the design and operation of the property? of the contracting party and cannot be used as an excuse to end the
contract.
Under a construction contract, the parties have two alternatives. The Frustration takes place only after a contract has been entered into,
copyright and ownership of the design can either remain with the and means that the contract ceases to have effect from a particular
contractor, who grants a licence to the employer to use the design date onwards. As such, it discharges an otherwise valid contract.
documents for the works, or the copyright material can be assigned In Neville and Sons v Guardian Builders [1995] the Supreme Court
to the employer upon execution of the contract. The copyright said that frustration arises whereby a supervening event occurs
design should not be transferred lightly and rarely is. without the default of either party, and for which the contract makes
no provision. The event must so significantly change the nature
3.10 Is the contractor ever entitled to suspend works? of the outstanding contractual rights and obligations from what the
parties could reasonably have contemplated, so as to make holding
Most standard forms of construction contracts in this jurisdiction them to its stipulations unjust.
allow the contractor to suspend works if payment is not made. It is important to note that frustration is forward-facing. It will not
In addition, the Construction Contracts Act 2013 (the “CCA”) discharge existing rights and obligations, but will discharge future
introduced a statutory right on the part of a contractor/sub- obligations under the contract in question.
contractor to suspend works under a construction contract for non-
payment. Significantly, if works are suspended in compliance with 3.13 Are parties which are not parties to the contract
the CCA and this suspension affects a contractor’s/sub-contractor’s entitled to claim the benefit of any contract right
ability to comply with the works programme, the CCA provides which is made for their benefit? E.g. is the second or
the suspension’s duration is to be disregarded when calculating the subsequent owner of a building able to claim against
contractual time limit to the works programme. the original contracts in relation to defects in the
building?
Parties are unable to avail of a benefit of any contractual right if they

are not party to the contract. This is due to the doctrine of privity in
this jurisdiction which prevents a contract from being enforceable

Matheson Ireland
in favour of or indeed against someone who is not a party to that (4) “The meaning which a document (or any other utterance)
contract. In order for a third party to receive a benefit, the claimed would convey to a reasonable man is not the same thing as
benefit must be independent or collateral to the main contract. This the meaning of its words. The meaning of words is a matter
is typically done through collateral warranties with third parties of dictionaries and grammars; the meaning of the document
(e.g., tenants, purchasers, funders). is what the parties using those words against the relevant
background would reasonably have been understood to mean.
The background may not merely enable the reasonable man
3.14 Can one party (P1) to a construction contract which to choose between the possible meanings of words which are
Ireland
owes money to the other (P2) set off against the sums ambiguous but even (as occasionally happens in ordinary
due to P2 the sums P2 owes to P1? Are there any life) to conclude that the parties must, for whatever reason,
limits on the rights of set-off? have used the wrong words or syntax.”
Lord Hoffman concludes with his fifth principle on how ambiguity
Set-off as a remedy has a legislative basis within section 6 (12) of within a construction contract should be interpreted:
the Construction Contracts Act 2013 stating that a decision by an
(5) “The ‘rule’ that words should be given their ‘natural and
adjudicator regarding payment disputes shall be binding, unless
ordinary meaning’.”
otherwise agreed by the parties and can be relied by any of them
by way of defence, set-off or otherwise in any legal proceedings.
The general position under building contracts is that set-off against 3.17 Are there any terms in a construction contract which
certified sums will be allowed provided there are no special are unenforceable?
provisions in the contract which prevent or restrict this practice. In
the case of Moohan and Another v S & R Motors Limited [2007] Terms of a construction contract which can be deemed unenforceable
IEHC 435, Clarke J. concluded that set-off was available. are:
a) liquidated damage provisions (where the damages specified
3.15 Do parties to construction contracts owe a duty of are not a genuine pre-estimate of loss but instead viewed as a
care to each other either in contract or under any penalty);
other legal doctrine? b) a clause which creates an indemnity against criminal liability;
c) a Construction Contracts Act 2013 renders ineffective “pay
The parties will normally owe a duty of care in both tort and contract. when paid” provisions; and
So, for example, builders of a house will have a duty in tort to take d) a clause seeking to circumvent the application of the
“reasonable care” to avoid reasonably foreseeable latent defects. A Construction Contracts Act 2013 will render the clause
concurrent duty in contract will be owed by the builder arising out unenforceable according to section 12(2) of the Act.
of their contractual obligation to act with skill and care.
3.16 Where the terms of a construction contract are of design and/or the contract is one for design only,
ambiguous, are there rules which will settle how that are the designer’s obligations absolute or are there
ambiguity is interpreted? limits on the extent of his liability? In particular, does
The leading interpretation case in the United Kingdom is Investors
Compensation Scheme v West Bromwich Building Society [1998]
A designer has obligations which are implied into the contract. The
1 WLR 896. The Irish Supreme Court reaffirmed the Investors
Sale of Goods and Supply of Services Act 1980 imply a number of
Compensation principles in the recent case of McMullan Brothers
terms which have an impact on the extent of a designer’s liability.
Limited v Mc Donagh [2015] IESC 19.
These include that the designer has the necessary skill to render the
Lord Hoffmann in the Investors Compensation lists his five service and that the services will be supplied with due skill, care and
principles in how to deal with ambiguity within the contract: diligence. It must be noted that these implied terms can be negated
(1) “Interpretation is the ascertainment of the meaning which the through the use of express terms within the contract. A designer will
document would convey to a reasonable person having all the not usually have to give an absolute guarantee of their work.
background knowledge which would reasonably have been
available to the parties in the situation in which they were at In design and build contracts, a contractor can assume responsibility
the time of the contract.” that works are fit for purpose unless otherwise explicitly stated in
Within his second principle, he expands on his previous principle: the contract. Yet a consultant is held to a less onerous standard of
“reasonable skill and care”, meaning that the contractor assumes
(2) “Subject to the requirement that it should have been
greater liability than those to whom they have subcontracted.
reasonably available to the parties and to the exception to be
mentioned next, it includes absolutely anything which would
have affected the way in which the language of the document
would have been understood by a reasonable man.”
He stresses in his third principle that when attempting to understand
the context to the agreement, this process should not evolve into 4.1 How are disputes generally resolved?
an impermissible investigation of the subjective intentions of the
parties in entering into the agreement: Mediation, conciliation, arbitration and litigation are the most
(3) “The law excludes from the admissible background the common methods of construction dispute resolution in this
previous negotiations of the parties and their declarations of jurisdiction. Contractual adjudication and expert determination
subjective intent.” are also used. The Construction Contracts Act 2013 provides
Lord Hoffmann in his next principle acknowledges that within a for statutory adjudication of payment disputes arising under
complicated background, understanding the intention can have construction contracts entered into after 25 July 2016.
minimum value in understanding the meaning of the document:

Matheson Ireland
sought had no assets in Ireland and no real likelihood of having assets

4.2 Do you have adjudication processes in your in Ireland (Yukos Capital S.A.R.L. v Oao Tomskneft Vnk Otkytoye
jurisdiction? If so, please describe the general Aktsionernoye Obshchestvo “Tomskneft” Vostochnaya Neftyanaya
procedures.
Kompania [2014] IEHC 115, in which one of the authors acted for
the successful respondent).
The Construction Contracts Act 2013 provides that a party to a
construction contract has the right to refer a payment dispute arising
under the contract for adjudication. To exercise this right, the party 4.5 Where the contract provides for court proceedings
Ireland

must serve a notice of intention to refer the payment dispute for court be upheld and enforced in your jurisdiction?
adjudication. The parties may then agree to appoint an adjudicator
within five days. If the parties are unable to reach agreement within
In relation to court judgments given in EU Member States,
that time, an application may be made for the appointment of an
Regulation (EU) No 1215/2012 (the “Recast Brussels Regulation”)
adjudicator from the panel established by the Minister for Business,
applies. The Recast Brussels Regulation applies to proceedings and
Enterprise and Innovation.
judgments in proceedings commenced on/after 10 January 2015.
Once the adjudicator is appointed, the party who initiated the The 2001 Brussels Regulation (Regulation (EC) 44/2001) continues
adjudication must refer the payment dispute to the adjudicator to apply to judgments in proceedings commenced before 10 January
within seven days beginning with the day on which the appointment 2015.
is made. The adjudicator must reach a decision within 28 days from The Recast Brussels Regulation provides that a judgment given
the date of the referral (or such longer period as may be agreed by in a Member State shall be recognised in the other Member States
the parties). With the consent of the referring party, the adjudicator without any special procedures being required and is enforceable
may extend this 28-day period by a maximum of 14 days. in other Member States without any declaration of enforceability
The decision of the adjudicator binds the parties until the dispute being required.
is finally settled by the parties or a different decision is reached on Enforcement of judgments from Iceland, Norway and Switzerland is
the reference of the payment dispute to arbitration or in proceedings governed by the Lugano Convention.
initiated in a court in relation to the adjudicator’s decision.
Regulation (EC) No 805/2004 of the European Parliament and
of the Council of 21 April 2004, which provides for European
4.3 Do your construction contracts commonly have Enforcement Orders for uncontested claims, applies to uncontested
arbitration clauses? If so, please explain how claims in civil and commercial matters.
Where foreign states are not Member States of the EU or contracting
parties to the Lugano Convention, the recognition and enforcement
Arbitration clauses are often included in construction contracts. The of judgments from such jurisdictions is governed by the common
Arbitration Act 2010 applies to all arbitrations commenced after 9 law rules of private international law. To enforce a judgment from
June 2010 and the UNCITRAL Model Law has the force of law in a foreign court at common law in Ireland, proceedings must be
Ireland (subject to the Arbitration Act). The Irish courts are very commenced before the Irish courts by either commencing an action
supportive of arbitration. on the foreign judgment or commencing fresh proceedings on the
While court challenges to an award are possible, the grounds for original cause of action.
challenges are very limited.
The parties can agree on the identity of the arbitrator or on a number 4.6 Where a contract provides for court proceedings in
of arbitrators to form a tribunal. Construction contracts generally your jurisdiction, please outline the process adopted,
provide for a default appointing mechanism, which typically any rights of appeal and a general assessment of
involves an application by either party to the president of a named how long proceedings are likely to take to reduce: (a)
professional body (for example, Engineers Ireland) requesting that
he or she appoint an arbitrator.
Article 19 of the Model Law confirms that the parties are entitled A court action is commenced by issuing proceedings (usually by
to set their own procedures. If no rules are chosen, and the parties way of a summons) in the appropriate court. The appropriate court
cannot subsequently agree upon how the procedure is to be jurisdiction for the proceedings will depend on the value of the
conducted, then the tribunal can set the procedures. claim. In civil actions in contract, the District Court has jurisdiction
to award damages not exceeding €15,000. The Circuit Court has
4.4 Where the contract provides for international jurisdiction to award damages not exceeding €75,000. The High
arbitration, do your jurisdiction’s courts recognise Court has original jurisdiction to hear virtually all matters and will
and enforce international arbitration awards? Please generally hear matters that exceed the monetary jurisdiction of the
advise of any obstacles to enforcement. Circuit Court.
Decisions of the lower courts can generally be appealed to higher
Ireland is a signatory to the New York Convention on the Recognition courts, or questions regarding a point of law can be referred to
and Enforcement of Foreign Arbitral Awards, which has the force of higher courts.
law in Ireland (subject to the Arbitration Act 2010).
Decisions of the High Court may generally be appealed to the Court
The Irish courts have shown a supportive approach to the enforcement of Appeal. The Court of Appeal was established in 2014. A decision
of arbitral awards. Enforcement is not generally problematic, unless of the Court of Appeal may only be appealed to the Supreme Court
there is reason to deny enforcement (the grounds for which are set if:
out at Article 36 of the Model Law). ■ the decision involves a matter of general public importance;
In a leading case, the High Court held that the Irish courts would or
not exercise jurisdiction over an application for the enforcement of ■ in the interests of justice, it is necessary that there be an
an arbitral award where the party against whom enforcement was appeal to the Supreme Court.

Matheson Ireland
A “leapfrog” appeal may be made directly from the High Court to However, if the case is suitable for admission to the commercial
the Supreme Court if the case involves a matter of general public division of the High Court (the “Commercial Court”), this timeline
importance or: may be reduced. The Commercial Court has extensive case
■ there is some other reason requiring that the interests of management powers and can deal with significant commercial
justice is met by an appeal to the Supreme Court; and disputes more quickly than the ordinary courts. To be admitted
■ there must be exceptional circumstances warranting a direct to the Commercial Court, the proceedings must be “commercial
appeal to the Supreme Court. proceedings” (for example, a dispute relating to a business document,
Ireland
business contract or business dispute) and, in general, must have a
Once proceedings are issued, the parties will exchange documents
value of over €1 million. Whether a case will be admitted to the
setting out their respective claims and/or defences. The parties may
Commercial Court is a matter for the discretion of the Commercial
also be required to disclose relevant documents to each other. This
Court judge.
process is known as discovery. The parties may also exchange
witness statements and expert reports in advance of the hearing. The length of time it may take to obtain a decision of the final
Oral evidence will usually be given by relevant factual witnesses court of appeal will depend on the complexity of the matter, the
and expert witnesses at the hearing of the case. jurisdiction of the appeal court, as well as other factors. Currently,
the Court of Appeal has a backlog of appeals, with appeals in that
The length of time it may take to obtain a decision of the court of
court taking over a year to be heard.
first jurisdiction will depend on the appropriate court jurisdiction, as
well as a number of other factors. It may take many months or even
years to obtain a decision of the court of first jurisdiction.

Matheson Ireland
Rhona Henry
Matheson
70 Sir John Rogerson’s Quay
Dublin 2
Ireland
Tel: +353 1 232 2000

Ireland
Fax: +353 1 232 3333

Email: rhona.henry@matheson.com
URL: www.matheson.com
Rhona Henry is a partner and head of Matheson’s Construction and

Engineering Group.
Rhona Henry is distinguished by her industry knowledge and extensive
market experience which includes advising on the build-out of capital
projects; construction/project finance; public-private partnership
construction and construction regulation.
Her experience in the area of construction/project contracts
encompasses the entire life cycle of strategic commercial arrangements
including:
■■ Major international construction projects including pharmaceutical
plants, infrastructure projects, utilities, data centres, power and
process plants, corporate headquarters and commercial offices.
■■ Bespoke project agreements/construction contracts (including the
RIAI, FIDIC, MF /1 (Revision 4 and 5), NEC and JCT contracts).
■■ EPC contracts.
■■ Professional/design team terms of engagement.
■■ Project/construction contract security including bonds, warranties
and guarantees.
■■ Procurement strategy route (design and build, management
contracting, construction management, EPC).
■■ Project/construction health and safety issues/project supervisor
appointments.
■■ Collateral warranties/direct agreements.
■■ Facilities management/services agreements.
■■ Interface agreements.
Matheson’s primary focus is on serving the Irish legal needs of internationally focused companies and financial institutions doing business in and
from Ireland. Our clients include the majority of the Fortune 100 companies. We also advise seven of the top 10 global technology brands and over
half of the world’s 50 largest banks. We are headquartered in Dublin and also have offices in London, New York and Palo Alto. More than 600 people
work across our four offices, including 80 partners and tax principals and over 350 legal and tax professionals.
Our strength in depth is spread across more than 20 distinct practice areas, including asset management and investment funds, aviation and asset
finance, banking and financial services, commercial litigation and dispute resolution, corporate, healthcare, insolvency and corporate restructuring,
insurance, intellectual property, international business, structured finance and tax. This broad spread of expertise and legal know-how allows us to
provide best-in-class advice to clients on all facets of the law.

Chapter 15
Japan Hiroyuki Sakazaki
Kanagawa International Law Office Hajime Kanagawa
to the contract lack legal capacity (kenri nouryoku) to enter into

such contract or individual parties of the contract have no mental
capacity (ishi nouryoku) or capacity to act (koui nouryoku); (iii) if
1.1 What are the standard types of construction contract either or both parties that sign the contract have no actual intention
in your jurisdiction? Do you have contracts which to validate the contract; or (iv) if either party is misrepresented or
place both design and construction obligations affected by duress (kyohaku) and their manifestations of intentions
upon contractors? If so, please describe the types of are considered to have defects.
have any arrangement known as management 1.3 In your jurisdiction please identify whether there is
contracting, with one main managing contractor a concept of what is known as a “letter of intent”, in
and with the construction work done by a series which an employer can give either a legally binding or
of package contractors? (NB For ease of reference non-legally binding indication of willingness either to
throughout the chapter, we refer to “construction enter into a contract later or to commit itself to meet
contracts” as an abbreviation for construction and certain costs to be incurred by the contractor whether
engineering contracts.) or not a full contract is ever concluded.
Japan has several types of template contracts that have been created As a matter of practice, LOIs are rarely used in Japan in connection
by industry associations and are widely used as templates. The most with the execution of construction contracts. However, LOIs are
widely used templates are (i) the Central Council for Construction commonly used in other contexts such as M&A, so it is not an
Business (chuuou kensetsu gyou shingi kai) model contracts (the unfamiliar concept. Whether or not the LOI is binding or non-
“CCMC”), used for private small-scale and large-scale construction binding may be specified in the agreement.
contracts and sub-contracting contracts, and (ii) a model form
drafted by the Private Associations of Architects and Contractors
1.4 Are there any statutory or standard types of insurance
(the “PAMF”). The PAMF is based on the CCMC and is the most which it would be commonplace or compulsory to
frequently used model form for private construction projects as a have in place when carrying out construction work?
matter of practice. For example, is there employer’s liability insurance
For design and supervision services, there is a model design and for contractors in respect of death and personal
supervision agreement drafted by the Private Associations of
Architects and Contractors (the “PAMDSA”). Further, there are
design and construction agreements drafted by the Japan Federation
By law, during the construction period, the parties to construction
of Construction Contractors and model domestic plant construction
contracts are only required to purchase (i) insurance that covers
contracts published by the Engineering Advancement Association.
employees of contractors, and (ii) insurance for defects in newly
constructed buildings if the contractor has not deposited funds to
1.2 Are there either any legally essential qualities needed cover such defects. Additionally, under the PAMF, contractors must
to create a legally binding contract (e.g. in common have fire insurance, construction insurance and any other insurance
stipulated under the design documents. This insurance must cover
specific requirements which need to be included in a the completed portion of construction works, building materials and
construction contract (e.g. provision for adjudication building facility equipment brought onto the construction site.
or any need for the contract to be evidenced in
writing)?
Under the Civil Code, in principle, contracts become valid and requirements; (b) labour (i.e. the legal status of those
binding after offer and acceptance, and no other actions are working on site as employees or as self-employed
required, except for certain types of agreements that are required sub-contractors); (c) tax (payment of income tax of
to be in writing (i.e. guarantee agreements/arbitration clauses). employees); or (d) health and safety?
However, contracts can be null and void or subject to exercise of
the rights to revoke the contract if: (i) the terms of the contract Under the Construction Business Act, construction contracts
violates public policy (koujyo ryouzoku); (ii) the corporate parties must include the (i) scope of work, (ii) price for the work, (iii)

Kanagawa International Law Office Japan
commencement and completion date, (iv) advance payment, (v) depends on who has supplied the construction materials. Generally,
variation, (vi) force majeure, (vii) price adjustment, (viii) damages works that have been built with materials supplied by the contractor
to third parties, (ix) use of materials and equipment, (x) inspection belong to the contractor until it hands over such construction work
and delivery, (xi) terms of payment, (xii) defect liability, (xiii) delay to the employer, unless otherwise agreed under the construction
and damages, and (xiv) dispute resolution. There are no statutory agreements. Similarly, works built using materials supplied by the
requirements for construction contracts in terms of (a) labour employer generally belong to the employer from the beginning of
contracts that contractors enter into with employees who engage construction.
in construction works at the construction site, and (b) safety and
Japan
If an employer supplies the materials, a contactor may use a statutory

hygiene. However, under the PAMF, the contractor must detail the
lien to retain the completed construction work until the construction
amount of expenses for social welfare including health insurance,
fee has been fully paid.
employee pension insurance and employment insurance as a
breakdown of the construction fee. If a construction project expires before the works have been
completed, the contractor generally may not request payment of
the construction fee unless otherwise agreed under the construction
contracts. However, if such completed portion is profitable to
released either in whole or in part when: (a) the works the employer, the contractor may attempt to claim a part of the
are substantially complete; and/or (b) any agreed construction fee in proportion to the completed portion.
Under the Civil Code, in principle, an employer must pay the

construction fee to the contractor in exchange for delivery or
completion of the works, unless otherwise agreed. Therefore, if the 2.1 Is it common for construction contracts to be
contractor fails to complete or deliver the construction works, the supervised on behalf of the employer by a third
employer has the right to retain all or part of the payment. In addition, party? Does any such third party (e.g. an engineer
the employer also has the right to refuse all or part of payment of the or architect) have a duty to act impartially between
construction fee until completion of the repair or the compensation if contractor and employer? Is that duty absolute or is
there are any defects in the completed works, depending on the scale it only one which exists in certain situations? If so,
of the defects and subject to a fair and equitable negotiation process. please identify when the architect/engineer must act
impartially.
However, the main contractor in a sub-contractor contract must
generally confirm completion of construction by the sub-contractor
within 20 days from the notice of completion and immediately accept In some construction contracts, the employer hires an architect to
delivery of the construction work if the sub-contractor requests it. supervise construction work as a supervisor, but this is not typical
Additionally, a main contractor engaging in sub-contractor contracts in Japan. A supervisor hired by an employer is considered to have a
of a certain size generally has the obligation to pay the construction duty of care to the employer and it is not generally expected for the
fee to its sub-contractor within 50 days from such sub-contractor’s employer to act impartially between the employer and the contractor.
offer to deliver the construction work. Under the PAMF, the
employer must make advance payment of the fee before completion
of construction works if the parties to the construction contracts have they will pay the contractor when they, the employer,
agreed to pay the construction fee in proportion to the percentage of have themselves been paid; i.e. can the employer
the construction works that have been completed. include in the contract what is known as a “pay when
paid” clause?
bonds (provided by banks and others) to guarantee Theoretically, such a provision could be included if both parties
performance, and/or company guarantees provided to agree, provided that, under the Construction Business Act, the main
guarantee the performance of subsidiary companies? contractor in a sub-contractor contract pays the construction fee to
Are there any restrictions on the nature of such bonds the sub-contractor as early as possible, but within one month from
and guarantees?
the main contractor’s receipt of its construction fee. Furthermore,
a main contractor engaging in sub-contractor contracts of a certain
Performance bonds are often used in public construction projects size generally has the obligation to pay the construction fee to its
that require deposits or other collateral to ensure the performance
sub-contractor within 50 days of such sub-contractor’s offer to
of the contractor under the Accounting Act (kaikei hou) or Local
deliver the construction work.
Government Act (chihou jichi hou), but such arrangements are
uncommon for private construction projects, other than overseas
projects. Performance bonds can take various forms, such as 2.3 Are the parties permitted to agree in advance a fixed
deposits, guarantees, or insurance, depending on the contractual sum (known as liquidated damages) which will be
arrangement, and there are no laws or regulations that prohibit or paid by the contractor to the employer in the event of
restrict the conditions of such performance bonds.
1.8 Is it possible and/or usual for contractors to have does the sum to be paid have to be a genuine pre-
retention of title rights in relation to goods and estimate of loss, or can the contractor be bound to
supplies used in the works? Is it permissible for pay a sum which is wholly unrelated to the amount of
contractors to claim that until they have been paid financial loss suffered?
The parties may agree to liquidated damages, which need not reflect
the actual or reasonably estimated amount of damage. However,
Under the Civil Code, ownership of construction works largely although the basic rule is that the court may not reduce the amount

of compensation for any damage incurred due to breach of contract by the employer due to any delay attributable to the contractor.
once such amount has been agreed under the contract (under However, for any delay attributable to the employer, the contractor
Article 424 of the Civil Code), there is an exception if the amount is not liable for any delay in construction and, depending on the
is unusually excessive or otherwise violates public policy (koujyo situation, may have a claim against the employer for reimbursement
ryouzoku), so there is some limit to the amounts that will actually be of cost or expenses that have increased due to the delay.
recognised by the courts. Under Article 20 of the PAMF, it is clearly provided the contractor
may claim (i) an extension of the construction period, and (ii)
reimbursement for costs and expenses that have increased due to the
Japan
3 Common Issues on Construction delay attributable to the employer.
Contracts
If a delay is caused by events that are attributable to both the
contactor and the employer, it is likely that either (i) the delay will
3.1 Is the employer entitled to vary the works to be done be solely attributable to the party that contributed much more to the
under the contract? Is there any limit on that right? delay than the other party, or (ii) the amount of compensation for
the damage that each party can claim from the other will be adjusted
Under the Civil Code, when the scope of construction work that has based on the relative fault of the parties.
been agreed under the construction contracts needs to be changed,
both parties thereto must agree with such change, unless otherwise 3.5 If the contractor has allowed in his programme a
agreed in the construction contracts. Under Paragraph 1 of Article period of time (known as the float) to allow for his own
28 of the PAMF, the employer has the right to add or change the delays but the employer uses up that period by, for
scope of construction work without the consent of the contractor, example, a variation, is the contractor subsequently
but the employer must accept the change in the construction fee entitled to an extension of time if he is then delayed
and compensate for the damage incurred by the contractor due to
such addition or change in scope. However, under Article 28 of the
PAMF, the contractor must obtain the employer’s consent to change The concept of “float” is not common in current Japanese practice.
the scope of construction work and any change in the construction However, in theory, if a “float” means a reserved period that can
fee inevitably resulting from such change of scope. cover possible delay of the contractor, and then if the employer
causes a delay solely attributable to it that uses up the “float”, and
the contractor has a delay that should have been covered by the
3.2 Can work be omitted from the contract? If it is “float” period, then there would have been no delay in the overall
omitted, can the employer do it himself or get a third construction period but for the delay attributable to the employer.
party to do it?
As a result, the contractor would not be liable to the employer
and under Article 20 under the PAMF, the contractor may demand
If omission of work from the contract can be regarded as a change extension of the construction period and compensation for the
in the scope of work, it may be subject to the process as discussed damage that has incurred due to the delay to the employer.
in the previous question. Also, any process that has been excluded
from the scope of work may be completed by the employer or any
third parties other than the contractor, because the law and the model 3.6 Is there a limit in time beyond which the parties to
construction contracts are basically silent on this issue. However, against each other? How long is that period and from
under Article 3 of the PAMF, if any process within the scope of what date does time start to run?
work relates to an excluded process, the employer is required to
coordinate the entire process and the contractor is required to
Under the Civil Code, claims in connection with design, construction
cooperate with other contractors that carry out the excluded process and supervising construction must be made within three years from
in accordance with such coordination. the time of completion of the design or construction work (or the due
date of the construction charge if agreed by the parties). In addition,
3.3 Are there terms which will/can be implied into a under the Civil Code and the Commercial Code, other than the items
construction contract? subject to a specific statute of limitation period (jyoseki kikan) (i.e.
claims for defect liability as discussed below), the general statute of
The provisions in the contracts should be reasonably interpreted limitation period (shoumetsu jikou) for claims under construction
based on the purposes of the parties, the circumstances to enter into contracts is (i) five years, if either party is a corporation or any other
the contracts, customs, and transaction conventions. Therefore, legal entity, or (ii) 10 years, if both parties are individuals. This
implied terms may be considered when interpreting contractual period generally starts from the time when the claim holder becomes
provisions depending on the situation. However, if the contract free from legal obstacles to exercise such claim. The specific statute
contains an entire agreement clause, the court might not allow the of limitation period (jyoseki kikan) for claims against contractors
parties to change or supplement the contractual provisions using for defect liability that the employer acquires in connection with
outside evidence and force the parties to only rely on the language construction work is (i) 10 years in case of buildings or any other
of the contract. constructions that are made of stone, soil, bricks, concretes, metals
or any other materials similar to them, and (ii) five years in case of
buildings or any other constructions that are made of materials other
3.4 If the contractor is delayed by two events, one the than those mentioned in (i) above, and starts from the delivery or
completion of the construction work.
concurrent delay? 3.7 Who normally bears the risk of unforeseen ground
conditions?
Under the Civil Code, in general, the contractor is liable for any
delay in construction and required to compensate damages incurred Except in the exceptional case where the fair and equitable principle

is applied and unless otherwise agreed under the construction

contract, in case of a fixed amount contract, the contractor basically 3.11 On what grounds can a contract be terminated? Are
bears the risk of unforeseen ground conditions. On the other hand,
under Article 16 of the PAMF, the parties to construction contracts those termination rights need to be set out expressly?
may negotiate and discuss changes in construction fees based upon
unpredictable events detrimental to the construction work caused by
Under the Civil Code, in general, a party may terminate a construction
unforeseen ground conditions.
contract if the other party fails to perform its material obligations.
Japan
After the work is completed, the employer may terminate the

3.8 Who usually bears the risk of a change in law contract if there is a defect in the object of the construction contract
affecting the completion of the works? and the purpose of the contract cannot be accomplished due to such
defect, but if the object of the construction contract is a building, the
Except in the exceptional case where the fair and equitable principle contract cannot be terminated and such defect can only be resolved
is applied and unless otherwise agreed under the construction by repair or compensation for damages. These conditions may be
contract, in case of fixed amount contracts, the contractor basically changed by contractual agreement. Furthermore, under the Civil
bears the risk of changes in laws. In practice, under Article 29 of Code, an employer can terminate a construction contract before the
the PAMF, the contractor is allowed to change the construction fee work has been completed by the contractor, but the employer will
if the amount becomes clearly inappropriate as a result of changes in need to compensate the contractor for any damages that arise due to
applicable laws, which may enable the contractor to transfer the risk the termination. Under the Civil Code, the parties may terminate
of a change in law to the employer to some extent. the contract on the above grounds even if this is not expressly set
out in the construction contract, unless the parties have specifically
relinquished such rights in the contract.
According to Paragraph 2 of Article 31 of the PAMF, the employer
may terminate a construction contract by sending a written notice to
the contractor for any of the following reasons:
The intellectual property in relation to the design and operation of
(1) the contractor does not start construction work after the
the property is usually owned by the creator of such intellectual starting date, without any justifiable reason;
property, unless otherwise contractually agreed. The intellectual
(2) the construction work is significantly behind schedule
property rights of design documents and buildings (insofar as without any justifiable reason, and it is unlikely that the
they have a creative design) are copyright and moral rights. The contractor would complete the construction work within the
intellectual property rights that may occur in relation to construction construction period or within a reasonable period after the
materials, building equipment and methods of construction are construction period;
patent rights, utility model rights, design rights and trademark (3) the contractor breaches Article 5 (prohibition of blanket
rights, which are usually owned by the inventor. subcontracting and blanket delegation) or Paragraph 1 of
Article 17 (repair due to construction work not following the
design document) of the PAMF;
(4) the contractor breaches the contract (in a way other than in
(1) to (3) above) and the purpose of the contract cannot be
Under the Civil Code, a contractor is not entitled to suspend work accomplished due to such breach;
unless agreed under the contract. Under Article 32 of the PAMF, a (5) the construction licence of the contractor is cancelled or loses
contractor may suspend work in the following situations: effect;
(1) advance payment or partial payment by the employer is (6) it is recognised that the contractor is in danger of becoming
overdue; unable to continue the construction work due to reasons such
(2) the employer, unreasonably, does not cooperate with the as suspending its payments (e.g. any note or cheque issued by
contractor to resolve doubts about conditions related to the contractor is dishonoured);
design and construction; (7) the contractor proposes termination of this agreement without
(3) the employer cannot prepare the construction site for the any reason that falls under Paragraph 4 of Article 32 ((1) to
contractor to use, or the contractor cannot perform due to (3) of the list below) of the PAMF; or
force majeure, etc.; or (8) the contractor or its members have relation to organised
(4) the construction was extraordinarily delayed due to reasons crime groups, etc.
attributable to the employer other than the above. Furthermore, according to Paragraph 1 of Article 31 of the PAMF,
Upon the occurrence of any of these conditions, the contractor must the employer may terminate the construction contract as necessary
send a written notice demanding cure of such situation within a by sending a written notice to the contractor (the employer will need
to compensate the contractor for any damages arising due to the
reasonable period and can only suspend work if such situation is not
termination).
cured by the employer within such reasonable period.
According to Paragraphs 4 and 5 of Article 32 of the PAMF, the
Also, under Article 32 of the PAMF, a contractor may suspend work
contractor may terminate the construction contract by sending a
by sending written notice to the employer if it is recognised that the
written notice to the employer in case any of the following occur:
employer may lack credibility to pay the construction price due to
reasons such as the employer suspending its payments. Similarly, (1) the period of delay or suspension (pursuant to Paragraph 1 of
Article 31 or Paragraph 1 of Article 32 of the PAMF) lasts for
in case law, a lower court has approved suspension of work on the
a quarter or more of the construction period or two months or
ground that the contractor feared non-payment of the construction more;
cost by the employer (Tokyo Dist Ct. Judgment of 29 August 1997,
(2) the construction cost is decreased by two thirds or more
1634 Hanrei Jiho 99). because the employer significantly decreased the construction
work;

(3) the employer breached the contract and the purpose of the P1 owes to P2 due to a construction contract or any other cause
contract cannot be accomplished due to such breach; (except for obligations arising from tortious acts) against obligations
(4) the employer or its members have relation to organised crime of the same sum which P2 owes to P1 due to a construction contract
groups, etc.; or or any other cause, as long as the requirements for set-off (e.g. the
(5) it is recognised that the employer lacks credibility to pay obligation which P2 owes to P1 is due, etc.) are satisfied. There is
the construction price due to reasons such as suspending its no provision in the PAMF limiting the rights of set-off.
payments (e.g. any note or cheque issued by the employer is
dishonoured).
Japan
3.12 Is the concept of force majeure or frustration known other legal doctrine?
the injured party? Is it usual/possible to argue There is no express provision in relation to a duty of care in the
“contracts for work” (ukeoi) section under the Civil Code. Under
the Civil Code, a contractor owes a duty to the employer to complete
its work and the employer owes a duty to the contractor to pay the
Under the Civil Code, the concept of force majeure is accepted, construction costs for the completed work. However, there is a
and if a party defaults due to force majeure or any other reason precedent where the court approved that the contractor, as an expert,
not attributable to the parties, such party will be released from the owes a duty to research the ordered content and owes a duty to
performance of such obligation in default (except for a default of provide information (including giving advice and explanation) to the
monetary obligations). Under the Civil Code, there is no concept employer as a supplementary duty based on the “principle of good
that completely matches frustration, but (i) a contract will terminate faith” (shingi-soku) (Nagoya Dist Ct, Judgment of 15 September
if a performance of an obligation becomes impossible to perform 2006, 1243 Hanrei Times 145) and there may be possibilities where
due to reasons that are not attributable to the parties, and (ii) the contractor owes a certain duty of care before the completion of
parties may revise or terminate a contract if (a) a major change of the work.
circumstances (objective circumstances) that was unforeseeable at
the time of the signing date occurs, (b) such major change cannot
be attributable to the parties, and (c) forcing a party to perform its 3.16 Where the terms of a construction contract are
obligations under the original contract is remarkably unfair and ambiguous, are there rules which will settle how that
against the “principle of good faith” (shingi-soku) (“the principle
of circumstantial change” (jijou henkou no gensoku)). However,
it is very unlikely that “the principle of circumstantial change” There is no particular rule that will be applicable when the terms of
would be applicable to a case where a contract has only become a construction contract are ambiguous (e.g. contra proferentem). As
uneconomic due to a change of economic situations, unless there is a mentioned in question 3.3, the terms of a contract are interpreted by
special provision under the contract to release the parties from their considering (a) the purpose of the parties, (b) the circumstances to
obligations in such a case. According to Article 29 of the PAMF, enter into such contract, (c) customs, and (d) transaction conventions,
the contractor may make a claim to change the construction price and in some circumstances may be interpreted by situations outside
in the construction contract to the fair value at the time of the claim of the contract and not limited to the terms of the contract.
if the construction price becomes clearly unsuitable due to a sudden
change of economic situations. 3.17 Are there any terms in a construction contract which
are unenforceable?
to claim the benefit of any contract right which is made In general, construction contracts are executed to bind the other
for their benefit? E.g. is the second or subsequent party to bear duties which are enforceable. Therefore, except for
owner of a building able to claim against the original cases where such duties are void due to violation of “public order”
contracts in relation to defects in the building? (koujo ryouzoku), or there is a cause for cancellation, such contracts
are enforceable.
In general, under the Civil Code, only the contracting parties are
entitled to claim contract rights, but if they designate a third party
as a beneficiary and such beneficiary has expressed its intention to of design and/or the contract is one for design only,
enjoy the benefit to the obligor, such beneficiary will be entitled are the designer’s obligations absolute or are there
to claim the benefit made under the contract (such contract is limits on the extent of his liability? In particular, does
categorised as a “contract for a third-party beneficiary” (daisansha the designer have to give an absolute guarantee in
no tame ni suru keiyaku) under the Civil Code). In practice, a respect of his work?
“contract for a third-party beneficiary” (daisansha no tame ni suru
keiyaku) is not used in construction contracts to benefit the second According to case law, in relation to design and supervision duties,
or subsequent owners of a building. designers are said to bear an advanced and broad duty of care as
for safety of buildings (Sup. Ct., Judgment of 6 July 2007, 1984
Hanrei Jiho 34). However, such duty of care does not necessarily
owes money to the other (P2) set off against the sums mean absolute or unlimited obligation. According to the PAMDSA,
due to P2 the sums P2 owes to P1? Are there any there are no clauses which indemnify or mitigate the obligation of
limits on the rights of set-off? the designer in relation to the deliverables, and on the other hand,
there are no clauses which increase the obligation of the designer
Under the Civil Code, unless otherwise provided by a special compared with the general obligation for non-performance.
agreement under a contract, P1 may freely set-off obligations which

Japanese court and the court must issue such order, unless any of the
following situations are applicable:
(1) the arbitration agreement is not valid due to a limitation of
4.1 How are disputes generally resolved? capacity to act (koui nouryoku) of either party;
(2) the arbitration agreement is not valid due to reasons other
In general, parties who cannot resolve a dispute by consultation than a limitation of capacity to act (koui nouryoku) under the
will use court procedures or alternative dispute resolution (“ADR”). laws and ordinances designated by the parties as applicable
to the arbitration agreement (in case there are no designated
Japan
According to Article 34 of the PAMF, if a dispute related to a

laws and ordinances, the laws and ordinances of the country
construction contract arises, the parties will first request a third party
where the place of arbitration belongs to will be applicable);
appointed by both parties to resolve the dispute or resolve the dispute
by mediation or conciliation through the “Construction Dispute (3) either party did not receive the required notice pursuant to the
laws and ordinances of the country of the place of arbitration (if
Commission” (kensetsu koji funsou shinsakai) (the “CDC”), which
the parties entered into an agreement which agrees on matters
is an ADR body established based on the Construction Business
concerning provisions unrelated to public order in such laws
Act that resolves disputes related to construction contracts. If such and ordinances, said agreement applies) during the appointment
dispute cannot be resolved by the above proceedings, the dispute procedure of the arbitrator or the arbitration procedure;
will be resolved by either an arbitration proceeding held by the CDC
(4) either party was unable to participate in the arbitration
acting as the arbitral tribunal, or by court procedures. procedure;
(5) the arbitral award contains a decision on matters beyond the
4.2 Do you have adjudication processes in your scope of the arbitration agreement or of the petition presented
jurisdiction? If so, please describe the general in the arbitration procedure;
procedures. (6) the composition of the arbitral tribunal or the arbitration
procedure is in violation of the laws and ordinances of the
Under Japanese law, there is a procedure similar to the adjudication country of the place of arbitration (if the parties have reached
process called “civil mediation”, which is a method of ADR an agreement on the matters concerning provisions unrelated
different from court proceedings and arbitration. However, since to public order in such laws and ordinances, said agreement
civil mediation can only be reached by an agreement between both applies);
parties, it is not the same as the adjudication process used in, e.g., (7) according to the laws and ordinances of the country of the
the United Kingdom. Though a court can make an order in lieu place of arbitration (if the laws and ordinances applicable to
of mediation if there is no chance that the parties would enter into the arbitration procedure are those of a country other than
an agreement, this order will cease to be effective if either party that of the place of arbitration, said other country’s laws and
ordinances apply) the arbitral award is not final and binding,
disagrees with the order.
or the arbitral award has been set aside or its effect has been
suspended by a judicial body of that country;
4.3 Do your construction contracts commonly have (8) the petition filed in the arbitration procedure is concerned
arbitration clauses? If so, please explain how with a dispute which may not be subject to an arbitration
arbitration works in your jurisdiction. agreement pursuant to the provisions of Japanese laws and
ordinances; or
In practice, it is not common for construction contracts to (9) the content of the arbitral award is contrary to public policy in
have arbitration clauses. Under the PAMF, if the ADR process Japan.
summarised in question 4.1 fails, the parties may either choose
arbitration or court proceedings. If arbitration is chosen and parties
enter into an arbitration agreement, under Japanese Arbitration Law, in a foreign country, will the judgment of that foreign
the arbitration proceedings will start with one of the parties filing court be upheld and enforced in your jurisdiction?
a petition to the arbitral body pursuant to the agreement. Even if a
party files a lawsuit with the court, the court must dismiss the case
Under the Japanese Civil Procedure Act, a judgment of a foreign
without prejudice if either party claims that there is an arbitration
court (“Foreign Judgment”) will be upheld (i.e. become valid) by
agreement between the parties. When the arbitration proceeding
the competent Japanese court without requiring any special action
starts, arbitrators will be appointed pursuant to the arbitration
within Japan, unless such Foreign Judgment does not satisfy any of
agreement and an arbitral tribunal consisting of such arbitrators will
the following conditions. Also, under the Japanese Civil Procedure
hear the case and make an arbitral award. The arbitral award binds
Act, a party who wishes to enforce a Foreign Judgment can apply
the parties under dispute and they may not file any objections to the
to the competent Japanese court for an execution judgment and,
arbitral body or to the court. A party wishing to execute an arbitral
in such case, the court must issue an execution judgment without
award must acquire an execution order from the court and carry out
examining the details of such Foreign Judgment, unless such
the execution pursuant to the Civil Execution Act.
Foreign Judgment is not final and binding or does not satisfy any of
the following conditions:
4.4 Where the contract provides for international (1) the jurisdiction of the foreign court must be recognised
arbitration, do your jurisdiction’s courts recognise pursuant to its laws and ordinances, or applicable treaties;
advise of any obstacles to enforcement. (2) the losing party must have been served (excluding service
by publication or any other service similar thereto) with
the requisite summons or order for the commencement of
Under the Japanese Arbitration Act, regardless of the place of litigation, or has appeared without being so served;
arbitration (i) an arbitral award shall be recognised (i.e. become
(3) the content of the judgment and the litigation proceedings
valid) by the competent Japanese court without requiring any
must not be contrary to public policy in Japan; and
special action within Japan, and (ii) a party who wishes to execute
(4) a mutual guarantee must be in place between Japan and the
an arbitral award can apply for an execution order to the competent
country where the Foreign Judgment is rendered.

issues, appeal to the Supreme Court. According to research made by

4.6 Where a contract provides for court proceedings in the Supreme Court of Japan, although the actual period depends on
your jurisdiction, please outline the process adopted, individual matters of each case, the average period of (a) a decision
by the court of first jurisdiction takes approximately nine months,
a decision by the court of first jurisdiction; and (b) a and (b) a decision by the final court of appeal takes approximately
decision by the final court of appeal. three years (however, lawsuits related to construction are likely to
take more time than the average civil lawsuit).
Japan
Under the Japanese Civil Procedure Act, a civil lawsuit will start with
the plaintiff filing a complaint to the competent court (usually to the Acknowledgment
district court) and the court serving the complaint to the defendant.
After proceedings such as preparatory proceedings to arrange The authors would like to thank Yuji Shimada and Brian Baker for
issues, pleadings, and taking of evidence, the court proceedings of their invaluable assistance in the preparation of this chapter.
the first jurisdiction will end with a judgment by the court. Parties Yuji Shimada is an Associate in the Kanagawa International Law
who disagree with the judgment may appeal to the superior court Office. Tel: +81 3 6206 6659 / Email: yujishimada@k-ilo.com.
(e.g. the high court), and, furthermore, parties who disagree with the Brian Baker is a Foreign Attorney in the Kanagawa International
judgment of the superior court may, only for reasons related to legal Law Office. Tel: +81 3 6206 6816 / Email: brianbaker@k-ilo.com.

Hiroyuki Sakazaki Hajime Kanagawa

Kanagawa International Law Office Kanagawa International Law Office
7th Floor, Urban Toranomon Bldg 7th Floor, Urban Toranomon Bldg
1-16-4 Toranomon 1-16-4 Toranomon
Minato-ku, Tokyo, 105-0001 Minato-ku, Tokyo, 105-0001
Japan Japan
Tel: +81 3 6206 6859 Tel: +81 3 6206 6651

Japan
Fax: +81 3 6206 6653 Fax: +81 3 6206 6653

Email: hiroyukisakazaki@k-ilo.com Email: hajimekanagawa@k-ilo.com
URL: www.k-ilo.com URL: www.k-ilo.com
Hiroyuki Sakazaki is counsel at Kanagawa International Law Office. Hajime Kanagawa is the founding partner of Kanagawa International
He represents Japanese and multinational clients in a broad range Law Office. He represents Japanese and multinational clients in a
of corporate and financial matters, including real estate finance broad range of corporate and financial matters, including mergers
transactions, corporate finance transactions and mergers and and acquisitions, project finance transactions, acquisition finance
acquisitions. He also has an expertise in cross-border transactions in transactions and corporate finance transactions. He also has extensive
emerging markets, especially in southeast Asia. Education: University experience in acquisition and financing of multiple renewable power
of Tokyo (LL.B., 2000); and University of Southern California (LL.M., projects under the feed-in-tariff regime in Japan. Education: University
2013). Bar Admissions: Japan. of Tokyo (LL.B., 1995); and University of Southern California (LL.M.,
2004). Bar Admissions: Japan and New York.
Kanagawa International Law Office

Kanagawa International Law Office is a globally-minded law firm, offering specialised knowledge and experience in international legal matters
including mergers and acquisitions, project finance transactions, acquisition finance transactions and corporate finance transactions, headed by Mr.
Hajime Kanagawa.

Chapter 16
Kenya Christine A. O. Oseko
Oseko & Ouma Advocates, LLP Anaciata Mbula
professional in the team, the management contractor works with the

client and designers from the outset (brief stage) through the project
cycle to completion. Where an integrated approach is followed, the
1.1 What are the standard types of construction contract manager will also provide designs.
in your jurisdiction? Do you have contracts which The management contractor ideally employs and manages works
place both design and construction obligations of contractors who carry out the construction of the project and he
is reimbursed for his management services, with payment being
only contract common in your jurisdiction. Do you based on the actual time of construction. The person therefore
have any arrangement known as management represents the client’s management functions as the client’s
contracting, with one main managing contractor authorised representative. As the facilitator and coordinator, the
and with the construction work done by a series role is performed by qualified experts such as architects, quantity
of package contractors? (NB For ease of reference surveyors or engineers.
engineering contracts.) 1.2 Are there either any legally essential qualities needed
In Kenya, there are two common contracting methods in the and intention to create legal relations), or any
construction industry: traditional construction contracts, where specific requirements which need to be included in a
design works and construction are separated; and integrated construction contract (e.g. provision for adjudication
contracts, also known as single source contracts, where design and or any need for the contract to be evidenced in
construction works are combined. The latter places both design and writing)?
construction obligations upon the contractor.
Traditional construction contracts separate the responsibility for Kenya is a common law jurisdiction where contracts are used to
design of the project from the aspect of construction. The separation define the rights and obligations of the parties to a contract. The
of the two entities is eminent even in circumstances where variants contract ensures that the employer’s project is completed as
of the basic system allow for co-operation between the contractor required; similarly the contractor receives commercial returns for
and client or his consultants. Other characteristics are that the work satisfactorily done. The intention to create a legal relation is
design work of the project is usually completed within a design-only derived from the interpretation and application of the conditions of
contract before the project commences on site, commonly at tender contract. The Law of Contract Act, Cap 23 Laws of Kenya (“the
stage. This makes the construction work of the project a sequential Act”) provides under its Section 2 that the common law of England
process. relating to contract, as modified by the doctrines of equity by Acts
of Parliament of the United Kingdom, to the extent of and subject
On the other hand, integrated contracts place on the contractor the to certain modifications in the Act, shall extend and apply to Kenya.
responsibility for design, construction and the commissioning of the
Contracts are defined as agreements enforceable by law. In order
project. By integrating both design and construction to one entity,
for a contract to be enforceable, there must be present in the contract
potential conflicts between the designer and the contractors are
certain essential elements. There must be a ‘lawful offer’ by one
avoided. In an integrated construction contract, planning for both
party and a ‘lawful acceptance’ by the other. When a person signifies
design work and construction can proceed simultaneously, hence the
to another the willingness to do something or not to do anything
likelihood of the project taking a shorter time. These contracts may
with a view to obtain the assent of that other person with respect
be considered under different variants such as: design and build;
to doing or not doing the thing, the person is said to have made an
build-own-operate-and-transfer; plant and design-build package
offer. Consequently, when the person to whom the offer is made
deal; and turnkey. Normally in an integrated contract, the client
signifies his assent thereto, the offer is said to have been accepted
provides to potential consortia detailed design and construction plan
in that case. However, if there is no such intention on the part of
as well as performance and operational requirements.
the parties, then in that case, there is no contract. For example,
Management Contracting mere agreements of domestic or social nature do not necessarily
Management contracting has long been embraced in Kenya. It is a contemplate creation of a contract.
form of contracting whereby the management contractor provides A contract is founded on an exchange of promises. Each party
a professional management service in a project. As a construction to a contract must therefore be both a promisee and a promisor.

Oseko & Ouma Advocates, LLP Kenya
Consideration is an English common law concept which is

concerned with the bargain of the contract. It is the recompense 1.5 Are there any statutory requirements in relation
given by the party contracting to another. In Kenya, for a contract to construction contracts in terms of: (a) general
to be valid, there must be a consideration which may be in cash, in-
kind, or through an act or abstinence, and these could be in the past, sub-contractors); (c) tax (payment of income tax of
present or future. employees); or (d) health and safety?
In construction and engineering, a contract should be effective in
Kenya
that it should give a result that meets the objectives of the project Construction contracts in Kenya are guided by various regulatory
and further reliably provides the intended long-term benefits sought. forms; namely statutory regulation, government policies, contract
The parties to the contract need also to have the necessary authority law, tort law and principles of equity. These regulatory forms impose
to contract and must also have suitably defined responsibilities. The specific requirements that regulate labour, tax payment, health, and
strategy in construction contracts is to develop a framework that safety. Statutory regulation sets standards required to be achieved
brings together and establishes boundaries of roles, responsibilities in a construction and engineering contract and prescribe penalties
and relationships between the parties to the construction project. for those who do not comply. Health, safety, environmental and
These include conditions under which the contract is to operate. land planning regulations ensure the safety of the construction, land
use planning and preservation of the environment. Contractors
1.3 In your jurisdiction please identify whether there is must comply with this authorisation above before being awarded
a concept of what is known as a “letter of intent”, in clearance for the works. Other statutory requirements such as in
which an employer can give either a legally binding or the Employment Act, 2007 set minimum wages, working hours,
non-legally binding indication of willingness either to and termination procedures of employees while the Occupational
enter into a contract later or to commit itself to meet Safety and Health Act 2007 sets the health and safety standards
for employers. Procurement laws in Kenya guide the process of
selecting a service provider for construction services in Kenya,
especially in the public sector, and if the construction is offered
In Kenya, the concept of “letter of intent”, though in use, has not
through a Private Public Partnership (“PPP”), then the PPP unit has
been embraced in construction and engineering projects. Instead,
a say in contract negotiations to ensure stability of the contractual
Heads of Terms (“HOTs”) are more prevalent and usually signed
obligations. Statutory requirements are effected through approvals,
subject to contract. There are other varied approaches adopted by
setting standards and accreditation mechanisms to which contractors
clients/developers under public or private procurement through
are strictly required to adhere.
advertising requests for proposals (“RFPs”) and reception of tenders.
Government construction and engineering projects are initiated by
way of tendering. The tendering process may entail preparation of 1.6 Is the employer legally permitted to retain part of
tender documents and selection of the contractors to be involved in the purchase price for the works as a retention to be
the tender in case of selective tendering. In such selection, the pre- released either in whole or in part when: (a) the works
negotiation stage may involve the signing of HOTs before the main
agreement is negotiated.
There is no legal requirement of the employer to retain part of the

1.4 Are there any statutory or standard types of insurance purchase price for works as retention to be released either in whole or
which it would be commonplace or compulsory to part upon completion of work. This, however, is provided under the
contract between the employer and the contractor and is enforceable
for contractors in respect of death and personal under contract law. In the circumstances, the contractor is required
injury, or is there a requirement for the contractor to to tender and construct as per clients’ designs and specifications.
have contractors’ all-risk insurance? Similarly, the contractor is required to carry out, superintend and
complete the works according to the specifications and rectify
There are specific standard or statutory insurance requirements for any defects in accordance with the contract. In some contracts,
construction and engineering projects in Kenya in common practice. the contractor is paid a lump sum, while in others milestones for
However, under the Work Injury Benefits Act, 2007 (“WIBA”) the payment are set. Some specify for the last payment to be made upon
employer is expected to have a WIBA policy to cover employees expiry of the defects liability period.
engaged in the execution of the insured’s project against accidental
bodily injury, disablement or death. Moreover, the policy for the 1.7 Is it permissible/common for there to be performance
Joint Building Council’s Standard Form of Contract provides in its bonds (provided by banks and others) to guarantee
clause 12 (3) that the contractor shall maintain insurances for such performance, and/or company guarantees provided to
amounts of indemnity as may be specified by way of provisional guarantee the performance of subsidiary companies?
sum in respect of any expenses, liability, loss, claim or proceedings Are there any restrictions on the nature of such bonds
which the employer may incur by reason of damage to any property and guarantees?
other than that caused by collapse, subsidence, vibration, weakening
or removal of supports or lowering of ground water. The policy is The use of performance bonds to guarantee performance is common
taken in the joint names of the contractor and the employer, though it practice in Kenya. In construction and engineering projects,
only protects the employer. Ideally, every insurance policy will have performance bond, also known as contract bond, is a surety issued by
a number of conditions which regulate the cover of the insurance. an insurance company or a bank to guarantee satisfactory completion
Most employers will require contractors to keep construction and of a project by the contractor. In tender documents, for example, it is
renovation works adequately insured with an insurance cover common practice that bidders supply bid bonds, which are applicable
acceptable to the employer and to maintain the cover for the defects during the tendering process, and performance bonds issued in favour
liability period. of the client once a tender has been awarded. In the event the contractor

is unable to complete the project satisfactorily according to the terms contains descriptions of items of work, their quantities, and the
of the contract, then the client is able to invoke the performance bond principles for measurement. Payments to the contractor are then
by up to the value of the incomplete work. Performance bonds are based on such measurements of work actually done, and such price
usually set at 10% of the contract price. For construction contracts, per unit of the work, which is based on valuations and certificates as
50% may be released immediately on completion of the work, with certified by the developer’s consultant. Other variants in payments
the balance being released after six months. under traditional contracts in Kenya are: the payment of a lump
sum where a specified sum of money is indicated in the contract
as payment to the contractor for the construction works; the prime
Kenya
cost method, where the contractor is reimbursed with the total costs
incurred plus a fee for his services to cover overheads and profit; and
contractors to claim that until they have been paid finally, the use of a schedule of rates, where there is no prescribed
they retain title and the right to remove goods and sum but a schedule of unit rates within the contract documents to
materials supplied from the site? be used when calculating payments made to the contractor by the
employer. Nothing entitles the employer to provide in the contract
It is not common practice in Kenya to have retention of title clauses that they will pay the contractor when they have themselves been
incorporated in construction contractual documentation, particularly paid; however, the parties enjoy the freedom to insert such a clause
because supplies forming fixtures under law become part of the real like “pay when paid” within the contract under the freedom of
contracting principle. Where work has been sub-contracted, most
property which belongs to the land owner. The supplier’s contract
sub-contracts make reference to the main agreement and, in this
can, however, incorporate terms and conditions that can be relied
case, “pay when paid” may be more realistic to negotiate, though
upon to claim payment for such goods and services delivered to
when it comes to enforcement in law, the same stands the risk of
the employer by way of damages. In construction and engineering
being viewed as an unfair contractual term.
projects, the contractor can still have a remedy under contract and
make claim of any non-payment for goods and supplies used in the In certain standard form construction contracts in Kenya, such as
works if properly incorporated in the contract. the Agreements and Conditions of Contract for Building Works
(1999) payment is scheduled at intervals stated in the appendix to
the conditions of contract. Such conditions include issuance of an
2 Supervising Construction Contracts interim payment certificate by the architect within seven days from
the date of receipt of the Quantity Surveyor’s Valuation.

supervised on behalf of the employer by a third party? 2.3 Are the parties permitted to agree in advance a fixed
Does any such third party (e.g. an engineer or architect) sum (known as liquidated damages) which will be
have a duty to act impartially between contractor and paid by the contractor to the employer in the event of
employer? Is that duty absolute or is it only one which particular breaches, e.g. liquidated damages for late
exists in certain situations? If so, please identify when completion? If such arrangements are permitted, are
Supervision of construction contracts by third parties on behalf of the pay a sum which is wholly unrelated to the amount of
employers is common in Kenya. The third party in this case acts as financial loss suffered?
the client’s representative and is responsible for managing the project
on behalf and in the interest of the client. The representative may Typically, parties are permitted to have provisions in the contract that
be an employee of the client, an architect, a chartered surveyor, or assign in advance responsibility for covering the costs of possible
an engineer. According to Public Procurement Oversight Authority occurrences which may be unforeseen. An example is payment of
of Kenya (PPOAK, 2006), the client’s representative is named in liquidated damages for delays and extension of time and payments
the conditions of contract and is responsible for supervising the for any defects. Such payment amounts must be agreed in advance,
execution of the works and administering the contract and must be an as a genuine pre-estimate of the loss. Otherwise, most disputes end
architect, or a quantity surveyor registered under the Architects and up in court where such fixed sums are viewed as punitive as opposed
Quantity Surveyors Act, Cap 522, or an engineer registered under the to a genuine estimate, notwithstanding that the parties may have
Engineers Registration Act, Cap 530. The duties of such third party signed the contract.
depend on the conditions of contract and the negotiating powers of
the parties. However, the supervisor is required under the contract 3 Common Issues on Construction
to exercise his discretion by giving his decision, opinion, approval or
Contracts
in taking any other action which may possibly affect the rights and
obligations of the employer or contractor. He is expected to exercise
such discretion impartially within the terms of the contract. Most 3.1 Is the employer entitled to vary the works to be done
contracts provide for dispute resolution mechanisms if either party under the contract? Is there any limit on that right?
is aggrieved with the determination of the independent third party.
In construction contracts, the employer and contractor may
2.2 Are employers entitled to provide in the contract that incorporate within the contract a provision for variation of works
they will pay the contractor when they, the employer, to be done. Where such provision is accepted, the employer is
have themselves been paid; i.e. can the employer entitled to make reasonable variations. However, in practice, such
include in the contract what is known as a “pay when variations are only done against the potential cost of such changes
paid” clause? and provides for a renegotiation of the cost between the parties.
Variations are often a source of conflict and have the effect of
It is common with traditional contracts in Kenya that a Bill of increasing the overall cost and time required for projects, and are
Quantities is established by the employer before tendering, which therefore treated with caution.

the Limitations of Actions Act, Cap 22 Laws of Kenya. Actions

3.2 Can work be omitted from the contract? If it is may not be brought after the end of six (6) years from the date on
omitted, can the employer do it himself or get a third which the cause of action arose on claims related to construction
party to do it?
and engineering contracts. In most contracts, this date starts running
from the expiry of the defects liability period or the date when the
Employers in construction and engineering projects would certainly certificate of occupation is issued, whichever is later.
demand that the work be handled to completion. Omitting work
from the contract may result in a suit for non-completion for which
Kenya
the contractor would refund the cost and damages with respect to 3.7 Who normally bears the risk of unforeseen ground
their particular portion of the project. If the relevant works are conditions?
organised with a variation or differentiation between the contract
for work and the contract for design, then the contractor may omit The acceptance of an obligation or duty in a construction contract
work if it does not agree to the variation. brings with it a reciprocal acceptance of risk. Whoever bears the
risk of unforeseen ground conditions depends on the construction
of the contract and whether such risk is incorporated within the
contractual clauses. In a design and build contract, also known as
an integrated contract, in most circumstances the contractor bears
the risk in relation to unforeseen ground conditions.
It has been general practice that, in construction contracts, terms
requiring work to be done diligently and progressed regularly
are expressly provided. However, courts can imply terms in a 3.8 Who usually bears the risk of a change in law
construction contract to give business efficacy to the construction affecting the completion of the works?
agreement. Law of sale of goods has also implied terms as to quality
and merchantability that may be applicable in construction contracts The risk of change in law comes about as a result of a change in
where procurement is a function of the contractor. legislation or introduction of new laws after the contractual base
date. Under the International Federation of Consulting Engineers
(“FIDIC”) form of contracts, such risks are generally retained by
fault of the contractor and one the fault or risk of the employer. In usual non-FIDIC contracting in Kenya, a change
his employer, is the contractor entitled to: (a) an in law is incorporated as a force majeure condition for which neither
extension of time; or (b) the costs occasioned by that party is liable. However, in PPP projects, political and legislative
concurrent delay? risks are borne by the Contracting Authority.
The Conditions of Contract for Procurement of Works or Plant, 3.9 Who usually owns the intellectual property in relation
2000 and the Public Procurement Oversight Authority provide to the design and operation of the property?
the following conditions which may affect cost and extension of
time: variations caused by the employer; a cause of delay giving
Ownership of intellectual property in construction depends on
entitlement to an extension as may be agreed in the contract; any
whether the designer is an employee of the property/project owner
delay or impediment or prevention by the employer; and suspension
or acts as an independent contractor. When the designer is a
by the employer not for a cause attributable to the contractor and
bona fide employee of the project owner, the work created by the
not necessitated by the contractor’s risk. For these, extension is
designer inures to the benefit of the project owner. Whereas, when
granted without a cost indication. Where a delay is the fault of the
the designer is an independent contractor and has discretionary
contractor, on the other hand, the contract may provide for notice
authority concerning the design, then the intellectual property
to be given to the employer and negotiation of an extension, failing
ownership inures to the benefit of the designer, unless otherwise
which costs for the delay may become payable to the employer.
contractually agreed. In this case, the project owner will require a
licence to use the intellectual property, and, in most cases, the use is
3.5 If the contractor has allowed in his programme a only limited to that particular project.
example, a variation, is the contractor subsequently 3.10 Is the contractor ever entitled to suspend works?
In certain circumstances, the contractor is entitled to suspend works;
for example, as a result of the employer’s default, frustration of
Interpretation of the contract should determine the ownership of contract and in events of force majeure.
the float in order to arrive at a conclusion of whether or not the
contractor should receive extra time to finish the work. If the
employer owns the float, then the contractor may be required to 3.11 On what grounds can a contract be terminated? Are
put in extra work to complete construction without an extension of
the set project deadline. If the contractor owns the float, then any Do those termination rights need to be set out
changes by the owner may result in an extension of the completion expressly?
period by the employer to the advantage of the contractor.
Most construction contracts recognise the owner’s right to terminate
3.6 Is there a limit in time beyond which the parties to a contract before a project’s completion for cause or without cause.
a construction contract may no longer bring claims Where termination for cause is applicable, grounds need to be set
against each other? How long is that period and from out expressly, while other grounds, even if not set out, are common
what date does time start to run? practice and law, such as bankruptcy and illegality. The contractor’s
right of termination on the other hand is usually limited only to
In Kenya, the limitation period for claims is generally governed by breach and force majeure circumstances.

the objective test approach in interpretation of such ambiguities.

3.12 Is the concept of force majeure or frustration known The courts look at the intention of the contracting parties by making
in your jurisdiction? What remedy does this give reference to ‘what a reasonable person having all background
knowledge as would have been available to the parties would have
uneconomic is grounds for a claim for force majeure? understood the terms of the contract to mean’. The courts in most
circumstances will take into account commercial common sense
while interpreting ambiguous terms in construction and engineering
Force majeure is a common and important contractual clause in
contracts. In some cases, ambiguity will be interpreted against the
Kenya
construction and engineering projects in Kenya. It absolves the
drawer of the contract.
innocent party (either the owner or contractor) from claims whose
causes are due to the forces of nature and which could not reasonably
have been expected. A contract becoming uneconomic is not a 3.17 Are there any terms in a construction contract which
readily acceptable force majeure condition unless specifically stated are unenforceable?
in the contract, and in most cases, certain qualifications to the clause
have to be negotiated and put in writing. Yes, courts are reluctant to enforce a liquidated damage clause where
the agreed amount is not proportionate to actual damages resulting
from a delay in a construction project. In other cases, courts are
3.13 Are parties which are not parties to the contract never willing to enforce unfair terms of a contract such as exclusion
entitled to claim the benefit of any contract right
clauses which exclude one party from liability that naturally should
subsequent owner of a building able to claim against be part of the contract. Exclusion of liability for personal injury
the original contracts in relation to defects in the and death is also not enforceable, nor is any obligation to perform
building? an illegal action.
Most contracts restrict third-party claims and, as such, only parties 3.18 Where the construction contract involves an element
to a contract can claim against it. The recourse of subsequent owners of design and/or the contract is one for design only,
will be to the vendor (owner) and not the contractor. Whether the are the designer’s obligations absolute or are there
owner in this case can recover from the contractor will depend on limits on the extent of his liability? In particular, does
the defects liability clause and if a certain amount of time has lapsed
in relation to the Limitation of Actions Act.
In traditional construction contracts, where the design work is

3.14 Can one party (P1) to a construction contract which separate from the construction work, there is an assumption that the
owes money to the other (P2) set off against the sums designers, in the process of completing the plan and specifications,
due to P2 the sums P2 owes to P1? Are there any have designed the work with all factors in mind through the projects
life cycle. The design responsibility lies with the employer;
however, the designer is responsible for design defects where there
The right to set-off is a contractual one and depends on agreement is a requirement that he owes a ‘fit for purpose’ obligation. Given
of the parties. Set-off can be effected where a party owes the other that the contractor is only provided with the design of work and must
sums or where there is a breach of obligation of one party for which build the works in accordance with it, the designer’s obligations are
the party is liable for certain costs. Most contracts will provide for to ensure that the design fulfils the ‘fit for purpose’ requirement.
automatic set-off, but if a claim arises, then an application to court In the absence of express words in the contract to the contrary, the
for a determination of liability will be made. designer generally has an absolute obligation to provide work that
is ‘fit for purpose’.
Duty of care under common law is a legal obligation that is imposed 4.1 How are disputes generally resolved?
by law to the extent that reasonable skill and care should be applied
when carrying out any task that could foreseeably cause harm to The dispute resolution methods which are commonly available in
others by professionals. For example, the Public Procurement the construction and engineering contracts include adjudication,
Oversight Authority Standard Bid Documents for Design-Build mediation, arbitration, court proceedings and expert determination.
& Turnkey Contracts (2007) provides that if the design-builder It is important that parties to a construction contract understand these
designates other employees, its foreman is responsible for the dispute resolution methods and ensure that the contract contains
prevention of accidents. Limitation of liability for a party’s own appropriate dispute resolution clauses. In the event of a dispute,
negligence is therefore not acceptable in most well-negotiated parties make an inference to the contractual dispute resolution clause.
contracts.

3.16 Where the terms of a construction contract are jurisdiction? If so, please describe the general
ambiguous, are there rules which will settle how that procedures.
Dispute resolution through an adjudication process is common in
In the construction and engineering industry, most contractual Kenya. According to the Chartered Institute of Arbitrators-Kenya,
disputes arise as a result of differences in opinion of the parties over adjudication processes are adversarial and involve parties to a
what the ambiguous terms of a contract mean. Kenyan courts take contract subjecting themselves before an adjudicator who uses their

own knowledge and investigations, while weighing the evidence

presented by the parties in order to arrive at a decision. The successful 4.5 Where the contract provides for court proceedings
party to an adjudication can apply to court for enforcement of an in a foreign country, will the judgment of that foreign
adjudicator’s decision. The decision of an adjudicator is binding
unless revised in arbitration or litigation in court.
Judgments arising out of foreign court proceedings can be upheld
and enforced in Kenya given that Kenya ratified the Convention on
4.3 Do your construction contracts commonly have the Recognition and Enforcement of Foreign Judgments in Civil and
Kenya

Commercial Matters. The Convention, however, only applies to
decisions rendered in civil or commercial courts of the Contracting
States. There are other restrictions to its application; for example,
Arbitration in the construction industry in Kenya is governed by
the Convention does not apply to decisions the main object of which
various laws, which include: the Constitution; the Arbitration Act,
is to determine questions of social security, succession, questions of
1995; the Arbitration Rules; the Civil Procedure Act Cap 21 Laws of
bankruptcy and questions of family law, among others.
Kenya; and the Civil Procedure Rules, 2010. The process involves
parties agreeing to resolve the dispute to a third party, the arbitrator.
The will of the parties prevail, however, where there is no consensus. 4.6 Where a contract provides for court proceedings in
Arbitration starts on the date that the respondent is served with a your jurisdiction, please outline the process adopted,
request to refer the matter to arbitration. The parties and the arbitrator any rights of appeal and a general assessment of
can agree on which rules to apply, and the arbitration clause in the how long proceedings are likely to take to reduce: (a)
contract can impose a set of procedural rules. However, where the
parties cannot agree on the rules, then the arbitrator has certain
procedural powers under Section 20, Arbitration Act. Arbitral
proceedings are confidential and confidentiality is maintained to In circumstances where the contract provides for court proceedings
the highest possible standards. Some international contracts also in Kenya for determination of construction disputes, the legal
stipulate for international arbitration forums/rules and such clauses proceedings are commenced when the plaintiff makes a formal
are enforceable in law. complaint or demand before a competent court. In making
the complaint, every pleading in the proceedings must contain
information as to the circumstances in which it is alleged that the
4.4 Where the contract provides for international liability has arisen. Every decree by a court may be appealed from
unless barred by some law and, in such circumstances, leave of the
advise of any obstacles to enforcement. court must be sought. An application for leave to appeal is made
within 14 days from the date the order to be appealed against is
made. Generally, court proceedings can take a long time depending
Kenya ratified the New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards 1958 (New York on compliance by the parties with the Civil Procedure Rules
Convention) on 10 February 1989, with a reciprocity reservation. to ensure just and expeditious disposal of matters. There are no
Moreover, Kenya is a signatory to the East African Community standard timelines before the courts. Matters can take anything
Treaty which recognises arbitration as the available means of dispute from two years to over 10 years, depending on the complexity and
settlement within the Community. If the international arbitral award co-operation of the parties involved. The court system in Kenya is
is covered by the New York Convention, it will then be recognised also back-logged to some extent.
and enforced by Kenyan courts. A challenge to enforcement may
only come about in situations where the award is not covered by the
New York Convention.

Christine A. O. Oseko Anaciata Mbula

Oseko & Ouma Advocates, LLP Oseko & Ouma Advocates, LLP
The Mirage Tower 1, 5th Floor The Mirage Tower 1, 5th Floor
Chriromo Road, Westlands Chriromo Road, Westlands
P.O. Box 47291-00100 P.O. Box 47291-00100
Nairobi Nairobi
Kenya Kenya
Kenya
Tel: +254 701 359 088 Tel: +254 703 144 060
Email: christine@osekoouma.com Email: ambula@osekoouma.com
URL: www.osekoouma.com URL: www.osekoouma.com
Christine is the Managing Partner at O&O Advocates and prides herself Anaciata heads the Commercial Law Department at O&O Advocates.
on her international experience which cross-cuts various jurisdictions. She holds an LL.B. from Moi University and an LL.M. in Oil and Gas
She is currently pursuing an M.B.A. at Warwick University (UK) and Law from the University of Aberdeen (UK), joining the list of very few
holds an LL.M. in International Business Law from Boston University experts in Oil & Gas, Mining and Energy in Kenya. Before joining O&O
(US). She obtained her LL.B. at Leicester University (UK) after which Advocates, Anaciata began her training in an international law firm in
she started her practice at O&O Advocates as an Associate while Nairobi, where she got exposure to commercial/corporate transactions
lecturing in various universities in Kenya, following which she took up of an international nature, mergers and acquisitions, corporate
a role as the Managing Partner. Under her leadership, the firm has restructuring, energy, construction and infrastructure, banking and
grown in leaps and bounds, serving both domestic and international real estate, among others. Her current areas of specialisation include
corporate clients. Christine’s areas of specialisation include energy, mining and general infrastructure project financing and public-
construction and project finance, real estate and banking, energy and private partnerships.
natural resources, intellectual property and labour law.
Oseko & Ouma Advocates, LLP (O&O) is a leading business law firm in Kenya. Our expertise spans over Corporate & Commercial Law, Oil &
Gas, Energy, Mining & Natural Resources, Project Finance, Construction & Engineering Projects, Real Estate & Banking, Intellectual Property Law,
and Commercial Dispute Resolution. O&O has a strong history of providing effective legal services to both local and multinational businesses,
including the government. We bring together knowledge across the firm’s specialisations, such as commercial, supply and distribution chains, M&A,
technology, financial services sectors, tax, energy, employment, manufacturing, real estate and banking.
We enable clients to actualise their commercial transactions and projects by supporting them throughout the process. The department is supported
by able internationally trained Advocates with vast local experience. Our legal networks have enabled us to successfully carry out both local and
transboundary transactions.

Chapter 17
Malaysia Janice Tay
Wong & Partners Siaw Wan Lim
dispute resolution and liability clauses. Provisions for adjudication

are not mandatory but we now see a trend to include statutory
adjudication compliant provisions in standard form contracts (e.g.
1.1 What are the standard types of construction contract AIAC standard forms).
have any arrangement known as management enter into a contract later or to commit itself to meet
contracting, with one main managing contractor certain costs to be incurred by the contractor whether
and with the construction work done by a series or not a full contract is ever concluded.
contracts” as an abbreviation for construction and Letters of intent are commonly issued by employers to a contractor
engineering contracts.) as an expression of intent to award the contract to the contractor.
Generally it is not legally binding as it is a “letter of comfort” and
The standard types of construction contracts used are build-only is not intended to create a contractual relationship until a contract
and design and build contracts. The following institutions have is formally signed. Notwithstanding this, the question of whether a
published standard form of construction contracts: letter of intent is legally binding or not depends on the nature of the
document itself. For example, if it is clear from the letter that the
(i) Ministry of Works (Jabatan Kerja Raya (“JKR”));
terms will bind the parties in the interim until a contract has been
(ii) Malaysian Institute of Architects (Persatuan Arkitek Malaysia signed, then courts are inclined to enforce the terms of the letter.
(“PAM”));
(iii) Institution of Engineers Malaysia (“IEM”);
(iv) Construction Industry Development Board of Malaysia which it would be commonplace or compulsory to
(“CIDB”); and have in place when carrying out construction work?
(v) Asian International Arbitration Centre (“AIAC”). For example, is there employer’s liability insurance
The standard forms for design and build contracts place obligations
for both design and construction on contractors. There is no issued have contractors’ all-risk insurance?
form of design-only contract in Malaysia.
Malaysia does not have a fixed or common form for management The statutory insurance required to be taken out in the construction
contracting, but is a familiar arrangement for sizeable projects. industry is workmen compensation insurance, as provided by
Section 26 of the Workmen’s Compensation Act 1952, to insure all
1.2 Are there either any legally essential qualities needed workmen employed to carry out construction work.
to create a legally binding contract (e.g. in common Other standard types of insurance would be Contractor’s All Risk,
law jurisdictions, offer, acceptance, consideration Erection All Risk, Public Liability Insurance and (in high design
and intention to create legal relations), or any liability contracts) Professional Indemnity Insurance.
or any need for the contract to be evidenced in 1.5 Are there any statutory requirements in relation
writing)? to construction contracts in terms of: (a) general
Contracts in Malaysia are governed by the Contracts Act 1950 and
common law. The general principles of common law specified above employees); or (d) health and safety?
would apply to form a legally binding contract, whether or not it is
a construction contract. Further, the parties to the contract should (i) General Requirements
have the capacity to enter into the contract and parties should ensure
Contractors undertaking construction works in Malaysia are
that all essential terms are included in the contract; for example,
required to be registered with CIDB pursuant to Section 25

Wong & Partners Malaysia
of the Lembaga Pembangunan Industri Pembinaan Malaysia to secure and/or guarantee the performance of the contractor’s
Act 1994. obligations under the contract. For example, see Clause 37 of the
(ii) Labour AIAC Building Contract 2018.
Local workmen are required to be registered under the Performance Bonds
Employee’s Social Security Scheme pursuant to the
There are two types of performance bonds in the market:
Employees’ Social Security Act 1969. All workmen
should also be insured under Section 26 of the Workmen’s ■ conditional performance bond, where the condition for the
Malaysia
Compensation Act 1952. demand on the bond must be fulfilled; and
(iii) Tax ■ unconditional or on-demand performance bond (and this
is the most commonly used), where the employer must be
A contractor who is a “registered person” under the Goods
paid upon demand regardless of whether there is a dispute
and Services Tax (“GST”) Act 2014 is required to charge
between parties as to the entitlement of the employer in such
GST for his services (Guide to the Construction Industry
instance or whether the sum in question is due.
(Goods and Services Tax), Royal Malaysian Customs). In
addition, for payment to a non-resident individual/company, The courts in Malaysia are generally hesitant to intervene in
the Income Tax Act 1967 requires the payer to withhold tax disputes relating to bonds. Where a party seeks an injunction to
from any such payment to pay such tax to the Inland Revenue restrain the demand made on the bond, the position is clear that the
Board of Malaysia. courts will only restrain (i) a bank from making a payment if there
(iv) Health and safety is clear evidence of fraud, and (ii) a beneficiary from receiving such
An employer has to ensure the safety, health and welfare at if there is fraud and unconscionability, pursuant to the underlying
work of his employees which includes providing training construction contract.
and supervision pursuant to Section 15 of the Occupational Company Guarantees
Safety and Health Act 1994. A safety and health officer
is required to be employed pursuant to section 29 of the A company guarantee is a guarantee usually given in the form of a
Occupational Safety Health Act 1994 for building operations letter by a parent or holding company of the contractor to guarantee
and engineering construction works, where the contract price the performance of the contractor under a construction contract and
exceeds RM20 million. to make good any breach by the contractor under the construction
contract. Accordingly, the guarantor is only liable to pay or step in
1.6 Is the employer legally permitted to retain part of to remedy if there has been a breach of the underlying construction
the purchase price for the works as a retention to be contract.
defects liability is complete? 1.8 Is it possible and/or usual for contractors to have
Retention sums are common in Malaysian construction contracts contractors to claim that until they have been paid
to secure due performance of the contract by the contractor. For they retain title and the right to remove goods and
example, the following standard forms provide for a retention sum materials supplied from the site?
of 5%–10%:
■ Clause 30.5 of the PAM Contract 2006. It is common for contractors to have retention of title rights in relation
■ Clause 58.6 IEM.CE 2011 Form. to the materials and goods to be used in the works. The standard
forms of construction contracts in Malaysia generally provide that
■ Clause 42.3 of the CIDB Form.
the title to such materials and goods to pass to the employer upon
■ Clause 30.5 of the AIAC Building Contract 2018.
the employer’s payment for such goods and supplies. Examples
It is commonly seen in practice that a certain percentage of such include:
retention sum is released when the works are substantially complete ■ Clause 20 of JKR Form 203A.
and the balance upon completion of any agreed defects liability.
■ Clause 14.2 of PAM Contract 2006.
This is also reflected in Clauses 30.6(c) and (d) of the PAM Contract
2006 and Clauses 30.6(c) and 30.6(d) of the AIAC Building ■ Clause 33.2 of CIDB Standard Form of Contract for Building
Contract 2018. Works 2000.
■ Clause 14.2 of the AIAC Building Contract 2018.
The Malaysian Court of Appeal in Qimonda Malaysia Sdn Bhd (in
liquidation) v Sediabena Sdn Bhd & Anor [2011] 2 AMCR 784;
[2012] 3 MLJ 422 (upheld by the Federal Court) held that retention 2 Supervising Construction Contracts
monies are by their very nature and purpose trust monies held by
the employer for a specific purpose as trustee for the contractor.
However, there is no requirement for the retention monies to be kept 2.1 Is it common for construction contracts to be
in a separate bank account even where the employer has gone into supervised on behalf of the employer by a third
liquidation. party? Does any such third party (e.g. an engineer
1.7 Is it permissible/common for there to be performance it only one which exists in certain situations? If so,
bonds (provided by banks and others) to guarantee please identify when the architect/engineer must act
performance, and/or company guarantees provided to impartially.
It is common for construction contracts to be supervised on behalf
and guarantees?
of the employer by a third party. This is usually the engineer,
architect, project manager or superintending officer (the contract
It is common practice in Malaysia that performance bonds and/ administrator).
or company guarantees are provided in a construction contract

The duty of the contract administrator would depend on the terms the evidence shows real loss inherently which is not too remote, then
of the construction contract under which he is required to act. In Section 75 Phrase will apply and permit him to recover “reasonable
undertaking his certification role (for example, of the certificate for an compensation” (i.e. substantial damages which are “reasonable and
extension of time, certificate of non-completion, certificate of making fair according to the court’s good sense and fair play”), capped at
good defects, certificate of completion, etc.), it is usually expressed the value of the sum expressed as liquidated damages.
or implied that he must act independently impartially, reasonably and
expeditiously.
Malaysia

Contracts
paid” clause?
An employer is entitled to vary the works to be done under the

Pursuant to the Construction Industry Payment and Adjudication Act
contract under the express terms of the contract or under common
2012 (“CIPAA”), an Act which applies to every written construction
law, whereby the contractor will be entitled to payment on a
contract save for certain limited exceptions, a conditional payment
quantum meruit basis.
clause is rendered void pursuant to Section 35.
Such works must be a change to the works specified in the original
Section 35 provides as follows:
contract and comply with the express procedural requirements as
“35. Prohibition of Conditional Payment well as the legalities.
■ Any conditional payment provision in a construction
contract in relation to payment under the construction
contract is void. 3.2 Can work be omitted from the contract? If it is
■ For the purposes of this section, it is a conditional payment
party to do it?
provision when:
■ The obligation of one party to make payment is
Generally, work can only be omitted from the contract under the
conditional upon that party having received payment
from a third party; or express terms of the contract.
■ The obligation of one party to make payment is
conditional upon the availability of funds or drawdown 3.3 Are there terms which will/can be implied into a
of financing facilities of that party.” construction contract?
The Malaysian Courts have construed Section 35 widely and taken
the view Section 35 provides mere examples and is not exhaustive. Yes. Some examples of implied terms are as follows:
There is uncertainty as to whether Section 35 is limited to (i) Implied by statute:
adjudications only and whether Section 35 (and CIPAA as a whole) ■ A contractor/sub-contractor may refer a payment dispute
is prospective only or retrospective due to recent court decisions, for adjudication (Construction Industry Payment and
such as the Court of Appeal’s decision in Bauer (Malaysia) Sdn Adjudication Act 2012).
Bhd v Jack-In-Pile (M) Sdn Bhd (CA) Civil Appeal No. B-02(C) (ii) Implied under common law:
(A)-1187-06/2017. ■ The employer shall fully cooperate with the contractor.
■ The contractor shall ensure the works are fit for purpose,
2.3 Are the parties permitted to agree in advance a fixed where the employer relies on the contractor’s skill and
sum (known as liquidated damages) which will be judgment.
completion? If such arrangements are permitted, are 3.4 If the contractor is delayed by two events, one the
there any restrictions on what can be agreed? E.g. fault of the contractor and one the fault or risk of
does the sum to be paid have to be a genuine pre- his employer, is the contractor entitled to: (a) an
estimate of loss, or can the contractor be bound to extension of time; or (b) the costs occasioned by that
pay a sum which is wholly unrelated to the amount of concurrent delay?
The position in Malaysia on this matter is not settled. Authorities
Yes, such clauses are common. from Commonwealth courts are instructive and have persuasive
In general, the law in Malaysia governing claims for LAD for delay value.
presently places the burden on the employer to prove its losses on a
balance of probabilities in order to succeed in its claim for liquidated 3.5 If the contractor has allowed in his programme a
and ascertained damages. period of time (known as the float) to allow for his own
The Federal Court case of Selva Kumar a/l Murugiah v Thiagarajah delays but the employer uses up that period by, for
a/l Retnasamy [1995] 1 MLJ 817 held that a party seeking to claim
liquidated damages must prove its actual losses, but remains bound after this float is used up?
by the cap on liability in the sense that it is unable to recover more
that the stipulated sum, even if it can proves loss in excess of that
The position in Malaysia on this matter is not settled. Authorities
stipulated sum. However, for cases where the court finds it difficult
from Commonwealth courts are instructive and have persuasive
to assess damages for the actual damage as there is “no known
value.
measure of damages employable” for the breach in question, and yet

Examples of these can be seen in Clause 1.3 of PAM Contract 2006

3.6 Is there a limit in time beyond which the parties to and Clause 1.3(c) of the AIAC Building Contract 2018.
what date does time start to run? 3.10 Is the contractor ever entitled to suspend works?
Limitation periods are typically imposed by the Limitation Act 1953 Generally, there is no right of suspension under common law and,
Malaysia
which is applicable in West Malaysia, the Limitation Ordinance in the absence of a contractual entitlement, the contractor’s act of
1952 (Sabah), the Limitation Ordinance 1959 (Sarawak) and the suspension may amount to a breach of contract.
Public Authorities Protection Act 1948. However, in the context of statutory adjudication, CIPAA provides
The limitation period for a contractual or a tortious claim is six years for a right to suspend performance or reduce the rate of progress of
from the accrual of the cause of action. performance of any construction work or construction consultancy
services under a construction contract if the adjudicated amount
The Limitation Act 1953 does not apply to any action or arbitration
pursuant to a successful adjudication decision has not been paid
to which the Government of Malaysia is a party (s 3, Limitation Act
wholly or partly.
1953). Instead, s 32 of the Public Authorities Protection Act 1948
provides that the limitation period for such action or arbitration is 36 The party who exercises his right under CIPAA:
months from the accrual of the cause of action. ■ is not in breach of contract;
■ is entitled to a fair and reasonable extension of time to
complete his obligations under the contract;
conditions? ■ is entitled to recover any loss and expenses incurred as a
result of the suspension or reduction in the rate of progress of
performance from the other party; and
The contractor normally bears the risk of unforeseen ground
■ shall resume performance or the rate of progress of
conditions. However, this is also subject to the negotiations of the performance of the construction work or construction
parties as there have been circumstances in which the employer consultancy services under a construction contract in
bore such risk. The contractor bears the risk in the JKR and IEM accordance with the contract within 10 working days after
standard forms. having been paid the adjudicated amount or an amount as
may be determined by arbitration or a court.

affecting the completion of the works? 3.11 On what grounds can a contract be terminated? Are
The employer normally bears the risk of a change in law affecting Do those termination rights need to be set out
the completion of the works in that the construction contract would expressly?
entitle the contractor to claim for an extension of time in such a
situation. For example, see Clause 23.8(b)(vii) of the AIAC The common grounds of termination are as follows:
Building Contract 2018.
(a) Default of obligations.
However, whether or not the contractor is entitled to an increase in (b) Insolvency events.
the contract price depends on the commercial negotiations of the
(c) Prolonged suspension.
parties.
(d) Force majeure.
Parties may also terminate a contract under common law on the
grounds of a repudiatory breach or the breach of a condition.
The JKR standard forms, which are most commonly used in the
public sector, also provide for termination on grounds of national
Copyright first vests in the creator of a piece of work. However,
interest, convenience, and corruption or unlawful activities.
pursuant to Section 26 of the Copyright Act 1987, copyright is
deemed to be transferred to the person who commissioned the work There are no avenues to remedy insolvency events and corruption or
or the author’s employer where work is commissioned under a unlawful activities. As such, the innocent party would be entitled to
contract of service or made in the course of employment. As such, immediately terminate the contract.
copyright would vest in the employer. There is no requirement to expressly set out termination rights,
An example of ownership vesting in the employer as works or although in practice, such termination rights would usually be stated.
materials are being developed can be seen in Clause 63.1 of the
JKR Form 203. 3.12 Is the concept of force majeure or frustration known
Note, however, Subrule 29(20) of the Architects Rules 1996, where in your jurisdiction? What remedy does this give
that architects own the copyright in all documents, drawings and successfully that a contract which has become
works executed from such documents and drawings unless agreed uneconomic is grounds for a claim for force majeure?
otherwise.
In practice, it is not uncommon for the parties to agree otherwise Construction contracts in Malaysia usually have a force majeure
in construction contracts where intellectual property rights would clause. A delay or breach by a party due to a force majeure event
vest in the employer as the employer typically require full rights to would entitle the said party to an extension of time or the excusal
use such property without further liability. In the standard forms, of the breach. However, force majeure is not applicable where the
however, the default position is that the contractor retains ownership delay was within the claimant’s contemplation and control (Golden
of such intellectual property rights, and the employer is given a non- Bay Realty Pte Ltd v Orchard Twelve Investments Pte Ltd [1989]
exclusive royalty free licence for the use of the designs or works. MLJ 70).

In general, force majeure provisions in contracts expressly

exclude economic downturn, insufficient funding or commercial 3.16 Where the terms of a construction contract are
impossibility. ambiguous, are there rules which will settle how that
3.13 Are parties which are not parties to the contract Where the terms of a construction contract are ambiguous, the courts
may adopt certain rules as to how such ambiguity is interpreted. For
Malaysia

example:
the original contracts in relation to defects in the (i) General Guidelines
building? First, a court interpreting a private contract is not confined to
the four corners of the document. It is entitled to look at the
In general, a contract cannot be enforced by or against a person factual matrix forming the background to the transaction.
who is a stranger to it; however, parties may be able to pursue Second, the factual matrix which forms the background to
other remedies available to them in tort. Collateral contracts and the transaction includes all material that was reasonably
warranties are also used as an exception to the doctrine of privity available to the parties.
of contract. Third, the interpreting court must disregard any part of the
background that is declaratory of subjective intent only.
3.14 Can one party (P1) to a construction contract which Lastly, the court should adopt an objective approach when
owes money to the other (P2) set off against the sums interpreting a private contract.
due to P2 the sums P2 owes to P1? Are there any (ii) Parol Evidence
limits on the rights of set-off? Extrinsic evidence will only be admitted and considered
if it falls under the exceptions permitted under s 92 of the
A party is entitled to set off where expressly provided for in the Evidence Act 1950.
contract. These items typically include deductions of retention sum, (iii) Contra Proferentum
liquidated and ascertained damages over payments and payments Any ambiguity is resolved against the party who seeks to rely
made to third parties. Such deductions are usually made simply or on the particular term in issue.
upon certification by the contract administrator unless the contract (iv) Ejusdem Generis
requires the contractor’s prior agreement or the decision of an
Where words of a particular class are followed by general
independent third party. However, there is a common restriction to
words, the general words only cover matters of the same
the rights of set-off which is to limit the setting off for monies owed class.
only in relation to the same construction contract, i.e. P1 cannot set
(v) Noscitur a sociis
off amounts to be paid to P2 under construction contract no. 1, for
the sums that P2 owes P1 under construction contract no. 2. The meaning of a word may be ascertained according to its
context.
However, in the context of statutory adjudication, there is authority
that set-offs arising from different contract(s) between the same
parties may not be raised. 3.17 Are there any terms in a construction contract which
are unenforceable?

A conditional payment provision in a construction contract is
other legal doctrine? void by virtue of s 35 of the Construction Industry Payment and
Adjudication Act 2012 (see above).
Parties to a construction contract may owe a duty of care to each Any terms which restrain the exercise of lawful trade will be void
other in contract and tort. (s 28, Contracts Act 1950). Further, provisions restricting a party
from enforcing his rights under the contract, or limiting the time for
Unless expressly provided for in the contract, the parties are under
the enforcement of his rights, will be void (s 29, Contracts Act 1950).
the following implied duties:
The Employer
(i) The employer must cooperate with the contractor; of design and/or the contract is one for design only,
(ii) the employer must not prevent the contractor from carrying are the designer’s obligations absolute or are there
out his works; limits on the extent of his liability? In particular, does
(iii) the works will be supervised by a qualified person; the designer have to give an absolute guarantee in
(iv) the employer will give the contractor possession and site
access; and
A designer is required to carry out his obligations with reasonable
(v) the employer must prepare and hand over the necessary
skill and care according to the standards of reasonably competent
documents to enable the contractor to carry out the works.
designer and to ensure that the works, when completed, are fit for
The Contractor their purpose. It is common in construction contracts to limit the
(i) The contractor is to undertake all work which is indispensably liability of the designer to the contract price or fee payable to them.
necessary for the completion of the work;
The designer is not required to give an absolute guarantee in respect
(ii) work is to be executed in a proper and workmanlike manner of his work.
using reasonable skill and care; and
(iii) materials or goods supplied must be fit for purpose.

(f) reinstatement of parties’ right to choose any law or rules

4 Dispute Resolution of law applicable to the substance of a dispute and arbitral
tribunal’s right to decide according to equity and conscience,
if so authorised by the parties (Section 30);
4.1 How are disputes generally resolved?
(g) express provisions empowering the arbitral tribunal to grant
pre- and post-award interest on any sums that are in dispute
Disputes are generally resolved by way of court litigation, (Section 33);
Malaysia
arbitration, adjudication and mediation.
(h) express provisions ensuring confidentiality of arbitration and
arbitration-related court proceedings (new Sections 41A and
4.2 Do you have adjudication processes in your 41B); and
jurisdiction? If so, please describe the general (i) reinforcement of principles of minimum court intervention
procedures. and finality of arbitral awards for domestic arbitrations
(repeal of Sections 42 and 43).
Malaysia enacted statutory adjudication with the Construction
Industry Payment and Adjudication Act 2012 (CIPAA).
CIPAA applies to every construction contract made in writing arbitration, do your jurisdiction’s courts recognise
relating to construction work carried out wholly or partly within the and enforce international arbitration awards? Please
territory of Malaysia, including a construction contract entered into advise of any obstacles to enforcement.
by the Government. Disputes which may be referred to adjudication
under CIPAA relate to payment for work done and services rendered Malaysia is a signatory to the 1958 New York Convention on the
under the express terms of a construction contract. Recognition and Enforcement of Foreign Arbitral Awards (“the New
The process is usually a documents-only procedure and lasts around York Convention”). An arbitration award obtained in a “foreign
100 days. The decision is temporarily but immediately binding state” (i.e. a State which is a party to the New York Convention) is
pending the final resolution of the subject disputes by arbitration, enforceable in Malaysia.
litigation or agreement between the parties. In the interim, the Enforcement of international arbitration awards may be refused for
losing party is required to comply with the adjudicator’s decision failing to meet the conditions set out in Section 38 or based on the
and pay the adjudicated amount unless the decision has been stayed grounds as set out in Section 39.
or set aside by the High Court. Section 38 of the Malaysian Arbitration Act 2005 provides that on
application in writing to the High Court with the award and written
4.3 Do your construction contracts commonly have arbitration agreement, an arbitration award from a foreign state shall
arbitration clauses? If so, please explain how be recognised and be enforced by entry as a judgment in terms of the
arbitration works in your jurisdiction. award or by action.
Section 39 of the Arbitration Act 2005 provides that recognition or
Arbitrations are governed by the Arbitration Act 2005 (“AA 2005”) enforcement of an arbitration award may be refused where:
which is based on the UNCITRAL Model Law and amended by (i) a party to the arbitration agreement was under any incapacity;
the Arbitration (Amendment) Act 2011 (“Amendment Act”) and
(ii) the arbitration agreement is not valid under the law to which
Arbitration (Amendment) (No. 2) Act 2018 which came into force
the parties have subjected it, or, failing any indication thereon,
on 8.5.2018. under the laws of the State where the award was made;
Section 8 of the AA 2005 expressly states that “No court shall (iii) the applicant was not given proper notice of the appointment
intervene in matters governed by this Act, except where so provided of the arbitrator or of the arbitral proceedings or was
in this Act”. Pursuant to section 10 of the AA 2005, it is mandatory otherwise unable to present that party’s case;
for the Malaysian courts to stay any court proceedings which are the (iv) the award deals with a dispute not contemplated by or not
subject of an arbitration agreement in favour of arbitration. A stay falling within the terms of the submission to arbitration;
will be refused where a party has taken a step in the proceedings or (v) the award contains decisions on matters beyond the scope
the arbitration agreement is null and void, inoperative or incapable of the submission to arbitration. That being said, where the
of being performed. decision on matters submitted to arbitration can be separate
The 2018 Amendments follow the latest revision of the UNCITRAL from those not so submitted, only that part of the award
Model Law and arbitral laws of leading jurisdiction in the region which contains decisions on matters submitted to arbitration
may be recognised and enforced;
and worldwide, and introduces changes such as the following:
(vi) the composition of the arbitral tribunal or the arbitral
(a) clarification of the status of an emergency arbitrator and
procedure was not in accordance with the agreement of
orders/awards granted by the emergency arbitration (Section
the parties, unless such agreement was in conflict with a
2 and new Section 19H);
provision of this Act from which the party cannot derogate,
(b) reinstatement of parties’ right to choose representation by any or, absent such agreement, was not in accordance with the
representative, not just a lawyer (new Section 3A); Arbitration Act 2005;
(c) a court’s power to look at the subject matter of the dispute, in (vii) the award has not yet become binding on the parties or has
deciding on arbitrability (Section 4); been set aside or suspended by a court of the country in
(d) clarification of the requirement that an arbitration should be in which, or under the law of which, that award was made;
writing – recognition of electronic means of communication (viii) the subject matter of the dispute is not capable of settlement
(Section 9); by arbitration under the laws of Malaysia; or
(e) comprehensive, yet balanced provisions dealing with the (ix) the award is in conflict with the public policy of Malaysia.
High Court’s and arbitral tribunal’s powers to grant interim
measures (Section 11, Section 19 and new Sections 19A–19J);

4.5 Where the contract provides for court proceedings 4.6 Where a contract provides for court proceedings in
in a foreign country, will the judgment of that foreign your jurisdiction, please outline the process adopted,
court be upheld and enforced in your jurisdiction? any rights of appeal and a general assessment of
Foreign judgments may be enforced by registration under the
Reciprocal Enforcement of Judgments Act 1958 (“REJA”) or by
Malaysia
way of a common law action.

An action usually commences by way of a Writ (where generally
Pursuant to REJA, a foreign judgment must meet the following
there are contested facts and which proceeds to trial) or Originating
requirements before it can be upheld and enforced:
Summons (where matters can be summarily disposed of).
(i) the foreign judgment must be delivered by a court listed
under the First Schedule of REJA 1958; The Malaysian courts are comprised of a hierarchical system of
courts with the Superior Courts and Subordinate Courts and the
(ii) it must be a final and conclusive decision between parties;
doctrine of stare decisis applies. The Superior Courts contain the
(iii) it must be a judgment for a sum of money payable (does not Federal Court, the Court of Appeal, the High Court of Sabah and
include sums such as taxes, fines or other penalties); and
Sarawak whereas the Subordinate Courts contain of the Sessions
(iv) the applicable registration must be made within six years Court, the Magistrates Court, Penghulu’s Courts, Native Courts
after the date of judgment, or if there was an appeal, after the and other miscellaneous courts and tribunals. There are specialised
date of the last judgment in the appeal.
construction courts in Malaysia.
The time to resolve disputes may generally take one to two years
from a decision by the court of first instance until a decision by the
final court of appeal.

Janice Tay Siaw Wan Lim

Wong & Partners (member firm of Wong & Partners (member firm of
Baker & McKenzie International) Baker & McKenzie International)
Level 21, The Gardens South Tower Level 21, The Gardens South Tower
Mid Valley City, Lingkaran Syed Putra Mid Valley City, Lingkaran Syed Putra
59200 Kuala Lumpur 59200 Kuala Lumpur
Malaysia Malaysia
Malaysia
Tel: +603 2298 7838 Tel: +603 2299 6405
Fax: +603 2282 2669 Fax: +603 2282 2669
Email: janice.tay@wongpartners.com Email: siawwan.lim@wongpartners.com
URL: www.wongpartners.com URL: www.wongpartners.com
Janice Tay is a partner in the Dispute Resolution Practice Group at Siaw Wan Lim is a partner in the Finance & Projects Practice Group at
Wong & Partners. Her expertise lies in construction and engineering. Wong & Partners and specialises in major projects, infrastructure and
She regularly advises and assists international and local clients construction matters.
on construction law in Malaysia. She is involved in international
She focuses on negotiating, drafting and advising on project
and domestic arbitrations and her portfolio includes litigation and
documentation including concession agreements, power purchase
appearances at all levels of the courts.
agreements, fuel supply agreements, engineering procurement and
Janice is a Fellow of the Chartered Institute of Arbitrators and a construction contracts, sub-contracts, consultancy agreements, project
Mediator, a qualified Adjudicator to adjudication disputes under the development partner agreements, handover, operation, maintenance
Construction Industry Payment and Adjudication Act 2012; and on agreements, port operating agreements, service agreements and
the Kuala Lumpur Regional Centre for Arbitration’s (KLRCA) panel of tender documentation. Her clients include sponsors, employers and
arbitrators, adjudicators and mediators. contractors from various sectors including general engineering and
construction, conventional power, renewable energy, oil and gas,
Janice is the current Deputy President of the Society of Construction Law
shipping, rail, health and education industries.
(Malaysia), Secretary of the Chartered Institute of Arbitrators (Malaysia)
and Committee Member of the Chartered Institute of Arbitrators
(Malaysia) Young Practice Group.
Wong & Partners is a Malaysian law firm dedicated to providing solution-oriented legal services to its clients. As a member firm of Baker McKenzie
International, we bring a unique combination of local knowledge and global experience to every matter. Since its establishment in 1998, Wong &
Partners has grown steadily and now consists of 18 partners and more than 50 associates. The Firm’s lawyers are able to deliver comprehensive
and integrated advice to clients, and are trusted by respected domestic and multinational corporations for their needs in Malaysia and throughout
Asia. The Firm’s lawyers are committed to helping clients apply industry-specific, innovative and practical solutions.
The Firm has been named Malaysian Law Firm of the Year by Chambers Asia Pacific 2018 and Asian Legal Business Malaysia Law Awards 2018
respectively; Malaysia Law Firm of the Year by Euromoney Asia Women in Business Law Awards 2017; Intellectual Property Law Firm of the Year by
Asian Legal Business 2018; Malaysia Deal Firm of the Year by Asian Legal Business 2017; and ranked Tier 1 in various legal directories in various
practices.

Chapter 18
Mexico
COMAD, S.C. Roberto Hernández García
■ For lump-sum contracts in the private sector, the contract

1 Making Construction Projects must be in written form, with a description of the work and
the amount or design of the work when applicable. The
contract can include clauses that parties consider appropriate
1.1 What are the standard types of construction contract
for the characteristics of the work, without affecting the
essence of the contract.
upon contractors? If so, please describe the types of ■ For contracts in the public sector, a public procurement
contract. Please also describe any forms of design- process must be followed in order to formalise a public
only contract common in your jurisdiction. Do you works contract. This type of contract must include all the
have any arrangement known as management requirements established in article 46 of the Law of Public
contracting, with one main managing contractor Works and Related services (LPWRS), such as the name of
and with the construction work done by a series the government authority, the applied public procurement
of package contractors? (NB For ease of reference procedure, the information of the bidder, the characteristics
throughout the chapter, we refer to “construction of the work to be done, and the amount and forms of payment
contracts” as an abbreviation for construction and (which are also established in the law). The bidder must
engineering contracts.) know the model contract at the time of the bid.
Mexico has not developed its own general standard types of

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

COMAD, S.C. Mexico
object of the contract. The most common insurances used in practice As for private contracts, the parties are entitled to freely agree the
are: professional liability (design); civil liability; general liability terms of retentions and translate such agreement into a contract
(all-risk); automobile; equipment or machinery; environmental; clause.
construction; or work insurance.
As for public work contracts, they usually oblige the contractor to 1.7 Is it permissible/common for there to be performance
provide insurance on certain matters, in order to cover contingencies bonds (provided by banks and others) to guarantee
during the execution of the contract. Depending on the procurement performance, and/or company guarantees provided to
Mexico
entity, there will be additional requirements according to internal guarantee the performance of subsidiary companies?
laws and regulations (Comisión Federal de Electricidad (CFE), Are there any restrictions on the nature of such bonds
and guarantees?
Petróleos Mexicanos (Pemex), etc.).
In Mexico, performance bonds are the most common mechanism

1.5 Are there any statutory requirements in relation for guaranteeing contractual obligations.
requirements; (b) labour (i.e. the legal status of those Regarding public works contracts, the LPWRS establishes in
working on site as employees or as self-employed its article 48 the requirement for performance bonds, which
sub-contractors); (c) tax (payment of income tax of must be provided in order to sign the contract. The amount and
employees); or (d) health and safety? specific conditions are established by the authority, but usually the
percentage is not higher than 10 per cent of the total contract value.
Regarding public contracts: With respect to private contracts, the existence of performance
(a) General requirements: for this type of contract, the LPWRS bonds is subject to the conditions agreed by the parties.
establishes a list of requirements that the contract must
include and comply with in order to be enforceable.
(b) Labour: labour law establishes that all companies must
comply with its terms, including sub-contractors, outsourcing supplies used in the works? Is it permissible for
companies, etc. contractors to claim that until they have been paid
(c) Tax: according to the tax laws, both parties shall comply with they retain title and the right to remove goods and
their own obligations. materials supplied from the site?
(d) Health and safety: this requirement is only for the contractor
in terms of article 67 LPWRS. It is not common practice to include these provisions in construction
Regarding private contracts: the parties can agree on the general contracts. Nevertheless, article 2644 of the Civil Code mentions
terms and conditions for the contract, as long as such agreements do that when the contractors have not been paid, they can retain the
not violate the public interest rules and statutory requirements, such work that has been constructed, but it does not mention the right
as the following: to retain the title or to remove goods. The only case in which this
(a) General requirements: for example, the lump-sum contract is would be possible is if the parties expressly agree and establish it as
required to be in written form, with a description of the work a contract clause.
and the amount or design of the work where applicable.
(b) Labour: it is important to distinguish whether the status of 2 Supervising Construction Contracts
those working on site is as employees of the employer or
employees of the self-employed contractor. For the first
assumption, the employer must comply with the obligations 2.1 Is it common for construction contracts to be
provided for in the Federal Labour Law. In the case of supervised on behalf of the employer by a third party?
self-employed contractors, the labour relationship will be Does any such third party (e.g. an engineer or architect)
between the contractor and the employees, so the contractor have a duty to act impartially between contractor and
is the party which must comply with the obligations of the employer? Is that duty absolute or is it only one which
Federal Labour Law (articles 10, 13, 15 FLL). exists in certain situations? If so, please identify when
(c) Tax: taxes must be paid according to the Tax Code. Each of the architect/engineer must act impartially.
the parties shall comply with its own obligations.
(d) Health and safety: in terms of article 15-C of the Federal It is common for construction contracts to be supervised by a third
Labour Law, the employer is obliged to review the party on behalf of the owner. Third parties are supposed to act
contractor’s compliance with the applicable measures for impartially, but in practice it is common for them to act on behalf of
safety, health and environmental protection. the owner. Usually the engineer or architect may provide elements
for the employer to decide on the suspension of the works, but unless
there is express authority of the third party (which is unusual), the
the purchase price for the works as a retention to be suspension will come directly from the employer.
For public contracts, the LPWRS establishes in article 46bis the include in the contract what is known as a “pay when
possibility for the employer to make a retention in two phases: (a) paid” clause?
during the performance of the works (as a performance guarantee);
and/or (b) after completion of the works (defects liability). The “Pay when paid” clauses are possible in private contracts. In
conditions of these retentions are one of the essential requirements accordance with article 1839 of the Civil Code, the parties have
of public contracts, as provided in section X of article 46 of the contractual freedom, which allows them to include whatever clauses
same law.

COMAD, S.C. Mexico
they deem convenient, and considering “pay when paid” is not an

essential requirement for the validity of the contract, it is entirely 3.3 Are there terms which will/can be implied into a
valid.
In the case of public works contracts, the LPWRS provisions are

2.3 Are the parties permitted to agree in advance a fixed automatically applicable and even if the contractual clauses are
silent or ambiguous with respect to a matter established in the
Mexico
LPWRS, the latter will apply.

completion? If such arrangements are permitted, are Concerning private contracts, parties may choose a specific piece of
there any restrictions on what can be agreed? E.g. legislation to apply to the contract. Therefore, the Civil Code of the
does the sum to be paid have to be a genuine pre- respective state, and/or the Commercial Code, shall apply.
financial loss suffered? 3.4 If the contractor is delayed by two events, one the
Liquidated damages are the most commonly used sanction for extension of time; or (b) the costs occasioned by that
breaches of contract under Mexican law. The parties can agree in concurrent delay?
advance a certain sum to be paid in the event of particular breaches,
or in the cases agreed by them. However, this kind of provision Regarding public contracts, article 46bis of the LPWRS mentions
has some restrictions. In private contracts, the amount of liquidated that if the delay is caused by the contractor, the contractual penalties
damages cannot exceed the value of the breached obligation, and in will apply, as long as they do not exceed the total price of the
public contracts, liquidated damages cannot exceed the amount of contract. In that case, there will not be an extension of time unless
the performance bond. the parties agree to one.
If the delay is caused by the employer, the contractor is entitled to
3 Common Issues on Construction receive: (i) the costs occasioned by that concurrent delay; and (ii) an
extension of the final deadline in the same proportion of the delay,
Contracts
in accordance with article 52 of the LPWRS.
In case there are two events that cause the delay, the affected party
3.1 Is the employer entitled to vary the works to be done can allege concurrent delay. Nevertheless, this has to be proved,
under the contract? Is there any limit on that right? notwithstanding that the law is silent on this.
For private contracts, the Civil Code does not establish a hypothesis
For public contracts, article 59 of the LPWRS allows the authority regarding the extension of time caused either by the contractor or
to modify the scope of the work, yet there are some limits on this the employer; however, in the case of the costs occasioned, article
right: variation in the scope is the responsibility of the authority, 1840 states that the parties can agree on a clause for liquidated
and the determination must be supported and establish the impact damages in case one of them does not comply with its obligations,
on the price and payment terms; such modification cannot vary the which may result in a delay.
contract term or price by more than 25 per cent, nor modify the
original project substantially.
If the changes exceed the mentioned percentage but do not vary the period of time (known as the float) to allow for his own
object of the contract, the parties can execute a Change Order, which delays but the employer uses up that period by, for
will be considered part of the contract. Public lump-sum contracts example, a variation, is the contractor subsequently
cannot be modified when the total price or term are affected.
Regarding private contracts, articles 2623 and 2627 of the Civil
Code provide that in a lump-sum contract, the employer is entitled There is no specific provision or case law regarding this matter, but
to vary the scope of the work. In this type of contract, it is essential in principle the contractor would not be entitled to an extension of
that the parties agree on the terms and conditions of the Change time, since that float is a way to “cover” the risks, and providing an
Order, due to all the changes that may be involved (in terms of extension would mean a double benefit for the contractor.
payment and time).
It is important to remember that the parties can agree such provisions
When executing a Change Order, it is important to verify that the in the contract.
new terms do not conflict with contractual provisions, but also
comply with applicable laws and regulations (i.e. Construction
Regulations).
3.2 Can work be omitted from the contract? If it is what date does time start to run?
party to do it? The generic period of the statute of limitations under Mexican law
is 10 years. Nevertheless, this period can be modified or changed in
In terms of article 2027 of the Civil Code, if the contractor omits an agreement by the parties.
the performance of certain work, the employer can do it himself or Additionally, article 66 of the LPWRS establishes that the employer
hire a third party to do it at the contractor’s expense. This provision can only make a claim within 12 months following the day of
applies to both private and public contracts, since article 13 of the completion and acceptance of the works; the claims may be made
LPWRS establishes that the Civil Code is supplementary. for latent defects and for any other responsibility that the contractor
may have incurred in terms of the contract.

COMAD, S.C. Mexico
However, it is important that the causes for termination are expressly

3.7 Who normally bears the risk of unforeseen ground set out in the contract so that the parties are clear as to under which
conditions? circumstances the contract can be terminated.
For private contracts, article 2618 of the Civil Code establishes that
3.12 Is the concept of force majeure or frustration known
every risk that may occur before the completion of the work will be
at the contractor’s expense, unless otherwise agreed by the parties. the injured party? Is it usual/possible to argue
Mexico
In the case that the contract is ambiguous, the Civil Code may be successfully that a contract which has become
applied, since it is supplementary to the LPWRS and the latter is uneconomic is grounds for a claim for force majeure?
silent (article 13 LPWRS).
Notwithstanding the aforementioned, unless otherwise stated in the Force majeure is recognised in our jurisdiction as an event that is not
construction contract, the owner shall bear the risk of unforeseen foreseeable where the party is unable to prevent it from happening.
ground conditions, and not the contractor. Given the nature of such events, it is not possible to ask for
liquidated damages (article 1847 Civil Code), unless one of the
parties had the opportunity to prevent the force majeure and did not
affecting the completion of the works? act correspondingly.
Under the terms of article 62 LPWRS, it is possible in public contracts
In public contracts, the party who bears the risk of a change in law to argue that the force majeure event caused the impossibility to
is the contractor, due to his obligation to comply with the applicable continue with the works, bringing about the early termination of the
law, in accordance with article 67 LPWRS. contract.
Regarding private contracts, in the case of lump-sum agreements, Case law states that for an event to be considered force majeure, it
all the risks that may arise during construction will be borne by the is not enough reason that the compliance with contract terms turns
contractor (article 2617 Civil Code); by interpretation of this article, more complicated or burdensome, but that it is impossible to be
it may be understood that the risk of a change in law is also included. accomplished.
However, it is important to negotiate risk allocation when drafting
a contract. 3.13 Are parties which are not parties to the contract entitled
to claim the benefit of any contract right which is made
for their benefit? E.g. is the second or subsequent
owner of a building able to claim against the original
The employer owns the intellectual property in public contracts According to article 1869 of the Civil Code, the third party is
in accordance with section XIII of article 46 LPWRS; all the entitled to claim the benefit only in cases where the parties to the
intellectual property rights derived from the contracted services will contract agree to establish that the benefit will be for this third party.
be the property of the employer except when there is an impediment.
In public contracts, the law does not contemplate this scenario and
In the case of private contracts, the Civil Code does not establish therefore, it is not possible.
anything about this; it must be agreed by the parties, but the owner
usually keeps these rights.
3.10 Is the contractor ever entitled to suspend works? due to P2 the sums P2 owes to P1? Are there any
This is rarely seen, but the contractor may suspend the works in cases
where the employer does not pay the contractor or there is extended In terms of the Civil Code, in these cases it is possible for the parties
force majeure. Also, the Civil Code recognises the concept of force to set off the debts up to the amount of the lowest one (articles 2185
majeure, which is commonly provided for in contracts. and 2186 Civil Code). The limitations to this right are expressly
mentioned in article 2192 of the Civil Code, some of which may be
applicable if one party waives this right, and/or if the debts to set off
there any grounds which automatically or usually are fiscal debts.
those termination rights need to be set out expressly?
Under the terms of article 60 LPWRS, a public contract can be other legal doctrine?
terminated on the grounds of general interest, and when it is
demonstrated that continuing with the work would not benefit Parties owe a duty of care to each other considering that they are
the State. The only scenario that the LPWRS contemplates for professionals, performing valid work under the law. Lack of duty of
the contractor to terminate the contract is when force majeure has care will impact on the performance of the contract and could cause
occurred, making it impossible to continue with the works (article a possible breach by the person that does not comply correctly.
62).
In terms of the Civil Code, which applies to private contracts and 3.16 Where the terms of a construction contract are
to public contracts in a supplementary manner, the innocent party ambiguous, are there rules which will settle how that
has the right to choose between requiring the compliance with the ambiguity is interpreted?
obligations of the contract, and terminating the contract (article
1949 Civil Code). Yes, the Federal Civil Code and the Codes of the 32 federative
entities, as well as the Commercial Code, provide rules for the

COMAD, S.C. Mexico
interpretation of a contract as follows: (i) the ambiguous term

must be interpreted in accordance with the other conditions of the 4.2 Do you have adjudication processes in your
contract, but also applying the sense that is consistent with the
procedures.
object and purpose of the contract; (ii) the customary practice of the
country of the party must be taken into consideration; and (iii) if it
is impossible to resolve the doubt through these rules, then it will There is no “adjudication” as understood in the United Kingdom,
Australia or Malaysia. However, parties may agree to submit their
be resolved in favour of the greater reciprocity of interests (articles
disputes to a Dispute Adjudication Board (DAB) as adjudication
Mexico
1851–1857 Civil Code).

processes have a binding effect. This is rather uncommon in Mexico
due to the lack of regulation.
are unenforceable?
In general, terms and conditions that are illegal and/or against the arbitration works in your jurisdiction.
public order or public interest provisions are not enforceable.
“Illegal acts” are understood as all acts that go against the law or Many construction contracts have arbitration clauses – mainly those
customary practice (articles 1830 and 1795 Civil Code). of CFE and Pemex. Arbitration in Mexico abides by the rules of
ICC, LCIA and the Commercial Code which follows the UNCITRAL
(United Nations Commission on International Trade Law) Model Law.
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 arbitration, do your jurisdiction’s courts recognise
the designer have to give an absolute guarantee in and enforce international arbitration awards? Please
respect of his work? advise of any obstacles to enforcement.
The designer’s obligations are not absolute with regard to situations Yes, the courts recognise and enforce international arbitration.
in which a construction contractor incurs a fault for construction Mexico is a signatory of the New York and Panama Conventions.
reasons and not due to design factors.

4 Dispute Resolution in a foreign country, will the judgment of that foreign
4.1 How are disputes generally resolved? There are provisions in the procedure laws for enforcement of a
judgment in a foreign court. The procedure and requirements have
According to the public contracts law, disputes are generally to be met in order to enforce a foreign judgment.
resolved through claims, conciliation, arbitration and trial (articles
83–104 LPWRS); nevertheless, the most used means to solve a 4.6 Where a contract provides for court proceedings in
dispute in Mexico regarding public contracts is still going to court. your jurisdiction, please outline the process adopted,
Disputes in private contracts may be solved through the mechanisms any rights of appeal and a general assessment of
agreed by the parties and established in the contract. In this case, the
law establishes no limitation. In order to choose a particular method decision by the final court of appeal.
of dispute resolution, it is important to know the type of project and
the most convenient resolution method.
In cases related to construction, this is a commercial matter. Usually
such matters are solved by civil or commercial courts. There is a
main procedure, an appeal and two federal instances. The entirety
of the instances may take between two to four years.

COMAD, S.C. Mexico
Roberto Hernández García

COMAD, S.C.
FEBO 29
Credito Constructor
Mexico City 03940
Mexico
Mexico
Tel: +52 55 5661 3733
Fax: +52 55 5663 0814
Email: rhernandez@comad.com.mx
URL: www.comad.com.mx
Roberto is an international attorney specialised in construction law,

public procurement law and compliance. He has a Master’s degree
in Mexican Administrative Law from the Universidad Panamericana,
Mexico City. He has also attended courses at prestigious universities
such as the University of California (Davis and Berkeley), the University
of Florida, Harvard University and Cambridge University, UK. He has
served as a leader in international construction groups; for example,
as Co-Chair of the International Construction projects Committee of
the International Bar Association (IBA), and Chair of the Infrastructure
Disputes Committee of the International Chamber of Commerce (ICC)
in Mexico. He is the Consulting Editor and Co-Author of: “Construction
and Infrastructure Disputes: A global handbook”; and “International
Public Procurement: A guide to best practice”, both published in the UK.
COMAD, S.C. is a prestigious boutique law firm, founded 51 years ago (1965), which specialises in: construction and infrastructure law (transactional
and disputes); public procurement (transactional and disputes); and corporate integrity in construction (training and advice). It has participated
in some of the most relevant infrastructure projects in Mexico and Central America. The firm and its members are recognised in international
independent publications such as Chambers and Partners, Who’s Who Legal and Euromoney. It is the only law firm certified in these areas of law
by the National Chamber of Consulting Enterprises (CNEC).

Chapter 19
Nigeria
Abuka & Partners, Legal Practitioners Patrick Abuka
contracting, with one main managing contractor To create a legally binding contract, the essential elements are, to
and with the construction work done by a series wit, offer, acceptance, capacity, intention to create legal relations
of package contractors? (NB For ease of reference and consideration must be present. The parties involved must be
throughout the chapter, we refer to “construction ad idem (consensual), with respect to the obligations they intend to
contracts” as an abbreviation for construction and create through the offer and acceptance process.
There is no legislation stipulating any mandatory rule that
construction contracts in Nigeria must be in writing. Except,
The most common standard forms of construction contract in
of course, in cases where the contract touches upon rights over
Nigeria are: the JCT standard form of contract (without quantities),
land, for which some statutes provide that it must be written.
2005 Edition; the standard form of building contract in Nigeria, 1990
Construction contracts may, therefore, in general, be oral, written
(SFBCN); the International Federation of Consulting Engineers
or partly written. A typical construction contract should be written
Contract (FIDIC), otherwise known as “The FIDIC conditions
with its terms expressly spelt out. Arbitration clauses, which are
of contract for construction for building and engineering works
usually incorporated into construction contract agreements, make it
designed by the employer, 1999 Edition”; the general conditions
mandatory that such construction contracts must be in writing (see
of contract for the procurement of works, 2011 (the GCC); and
the Arbitration and Conciliation ACT, Cap. A18 LFN 2004).
the Federal Ministry of Works standard conditions of contract
(Roadworks), 1999 Edition (FMOWC). The use of standard form
contracts in Nigeria has been found to be convenient, time-saving 1.3 In your jurisdiction please identify whether there is
and cost-effective in the construction industry. a concept of what is known as a “letter of intent”, in
However, the forms may be amended to suit the requirements non-legally binding indication of willingness either to
of some types of projects, if so required. In fact, the standard enter into a contract later or to commit itself to meet
form contracts are mostly used by public sector entities, but not certain costs to be incurred by the contractor whether
necessarily so by private sector construction contracts. or not a full contract is ever concluded.
In Nigeria, the JCT Design & Build Contract 2005 places the
obligations for design and construction on contractors, especially in The concept “Letter of Intent” is well recognised in the construction
engineering and construction contracts. industry in Nigeria, and whether or not a letter of intent can create
a binding contract is dependent on the facts and circumstances of a
Any of the standard form construction contracts can be adopted to
particular case. A letter of intent which contains the fine elements of a
conclude a design-only contract which may operate under the Special
valid contract (i.e. offer, acceptance, intention to enter legal relations,
Conditions of Contract (SCC), depending on the requirements of the
etc.) coupled with performance from the party acting upon the same,
particular construction project in Nigeria.
may create legally binding obligations. But, where the terms are still
Yes, management contracting is a well-accepted arrangement in being negotiated prior to an agreement, the party who acted thereon
Nigeria’s construction industry. would be compensated only on a quantum meruit basis.

Abuka & Partners, Legal Practitioners Nigeria
(d) There is no construction industry-specific legislation on

1.4 Are there any statutory or standard types of insurance health and safety requirements in Nigeria. However, the
which it would be commonplace or compulsory to Employees Compensation Act 2010 makes provision for
have in place when carrying out construction work? compensation of the employee in case of death, injury, disease
For example, is there employer’s liability insurance or disability which may arise in the course of employment.
for contractors in respect of death and personal The Factories Act (FA), 2004, does not cover construction
sites in its definition of “Factory”. This means, therefore,
that the provisions for both safety and health of workers in
Nigeria
the said Act exclude employees under construction contracts.
There is no statutorily required type of insurance specific to the However, S57 of the FA empowers the Minister of Labor
construction industry. However, most standard form construction and Productivity to make a regulation which will extend
contracts prescribe insurance cover in the names of both the the provisions of the FA on safety and health to works and
employer and the contractor. The following are types of insurance engineering construction sites. It is expected that, when
commonly required in construction contracts: the Labor Safety, Health and Welfare Bill 2012 (LSHWB)
is signed into law by the President, safety and health
■■ All risks insurance/loss insurance.
considerations as they relate to construction activities will be
■■ Public liability insurance. covered adequately.
■■ Professional indemnity insurance (on a “claims made” basis
for professional negligence).
■■ Latent defect insurance. the purchase price for the works as a retention to be
working on site as employees or as self-employed It is common for construction contracts to contain a Retention Bond
sub-contractors); (c) tax (payment of income tax of (or Guarantee) for the contractor, in the place of cash, which the
employees); or (d) health and safety? employer ought to have retained, prior to full completion of the
contract.
(a) There are none. However, construction work may not be
undertaken without satisfying the statutory provisions of
the Land Use Act 1978 (LUA), which regulates the use, 1.7 Is it permissible/common for there to be performance
ownership and administration of land in Nigeria. Also, the bonds (provided by banks and others) to guarantee
Nigerian Urban and Regional Planning Law (NURPA 1992) performance, and/or company guarantees provided to
must be considered before any development upon any land guarantee the performance of subsidiary companies?
situate in any state in the Federation may take effect. There Are there any restrictions on the nature of such bonds
is a requirement that the builders in the country must possess and guarantees?
the requisite licences and skills, obtained by registration in
the council of Registered Builders of Nigeria (CORBON) It is common practice in the construction industry for contractors
established by the Builders (Registration etc.) Act, 1989. In to take out performance Bonds/Guarantees, Advance Payment
terms of the technical or professional expertise required to Bonds and Retention Bonds for the benefit of the employer as
act as an engineer in the construction of public buildings, security for the performance of their obligations under the contract.
such professional must be registered with the Council of
Under some standard forms of construction contract, like the GCC
Registered Engineers of Nigeria (COREN) established under
the Engineers (Registration, etc.) Act, 1970 (ERA). In fact, and the FIDIC contracts, the employer may terminate the contract
there are sundry issues in the construction industry in Nigeria on grounds of failure by the contractor to take out such bonds in
that may require a contractor to seek specialist guidance. applicable circumstances. There are no restrictions on the nature
(b) There are quite a number of pieces of labour legislation of such bonds, but the nature of such is usually determined by the
that employers and contractors must comply with. These obligations they create.
include the Labour Act 2004 which regulates all aspects
of employment in Nigeria, such as terms of employment,
wages, classes of workers, probationary periods, redundancy,
etc. The Employees Compensation Act 2010 (ECA) and supplies used in the works? Is it permissible for
the Labour Safety, Health, and Welfare Bill 2012 (LSHWB) contractors to claim that until they have been paid
await the President’s assent. When signed into law, they shall they retain title and the right to remove goods and
repeal the extant Factory Act, 2009, and only then shall safety materials supplied from the site?
and health issues, with respect to construction activities, be
adequately covered.
In Nigeria, construction contracts are structured in accordance with
(c) Employers and employees are required to register for a
standard forms of construction contract and, even in negotiated
monthly co-contributory pensions scheme with the Nigerian
Social Insurance Trust Fund Scheme (NSITF). Such funds bespoke contract forms, there are no express or implied terms which
are further remitted to the Pensions Fund Administrator vests title rights to goods and supplies used in the works. As security
(PFA) of choice for the benefit of the employee at its maturity. for prompt payment in construction contracts, usually the contract
Income received as wages are tax-deductible from source will have a provision which ensures the arrangement for payment
by employers under the pay-as-you-earn (PAYE) scheme to the contractor, and such obligation to pay for the works forms
and are remitted to the State Inland Revenue Service (IRS). part of the terms of the construction contract. Failure to pay as
Employers and/or contractors, as incorporated companies, and when the payment falls due constitutes an actionable breach of
pay Company Taxes to the Federal Inland Revenue Service
contract. The contractor’s options to remedy are damages, interest
(FIRS). There are other taxes, which include education tax,
or additional payment, where there is no prior notice to withhold
etc., which may be payable under construction contracts in
Nigeria. payment issued by the employer, in accordance with the contract.

The common law remedy of lien has been overtaken by Guarantees/

Bonds, which may be provided in the contract.
Contracts

Nigeria
supervised on behalf of the employer by a third The rights and entitlements of the employer are provided under the
party? Does any such third party (e.g. an engineer contract and there is no limitation by any statute or otherwise to
fetter such right to vary the works, save the contract itself. Any
it only one which exists in certain situations? If so, variation which would fundamentally change the works would
please identify when the architect/engineer must act automatically constitute a new contract. It will be a question of
impartially. fact to prove the existence, if any, of a variation in the nature of the
works. Where the employer accepts a proposal for acceleration to
Construction contracts usually contain provisions for the adjust the completion date, the said act will be incorporated into the
employment of a third party as the construction manager, who is contract price and deemed a variation.
an agent of the employer. He also performs quasi-judicial decision-
making functions and supervises the works. Such construction 3.2 Can work be omitted from the contract? If it is
manager is bound to act impartially. In directing relations between omitted, can the employer do it himself or get a third
the employer and the contractor, the construction manager’s duty as party to do it?
an agent of the employer is limited by the terms of the contract and
he must act independently and impartially, when communicating Any item of work which the employer chose to omit whilst drawing
with both of them. However, except where the provisions of the the contract necessarily cannot be part of the contract, and the right
contract places limitations on the powers of the construction to do the work himself or award it to a third party is also not fettered
manager, as the employer’s agent, his duty becomes absolute under by any external instrument or statute. It is uncommon for contracts
the common law rule of “Qui facit per alium, facit per se” (he who to stipulate that the employer may omit work for the purpose of
acts through another is deemed to act by himself). awarding it to another party.
2.2 Are employers entitled to provide in the contract that 3.3 Are there terms which will/can be implied into a
they will pay the contractor when they, the employer, construction contract?
paid” clause? The various rights and obligations of parties to a contract are often
provided in the specific contract. In Nigeria, implied terms are read
No. Such “pay when paid” concept is unknown and inapplicable in into the contract by either the conduct of the parties, or operations of
the construction industry in Nigeria. law or by the custom or usage of the trade to which the transaction
relates. Implied terms often flow or read into the express terms of
the contract. However, any term which would contradict the express
2.3 Are the parties permitted to agree in advance a fixed terms and character of the contract would not be implied into the
contract.
completion? If such arrangements are permitted, are 3.4 If the contractor is delayed by two events, one the
there any restrictions on what can be agreed? E.g. fault of the contractor and one the fault or risk of
does the sum to be paid have to be a genuine pre- his employer, is the contractor entitled to: (a) an
estimate of loss, or can the contractor be bound to extension of time; or (b) the costs occasioned by that
pay a sum which is wholly unrelated to the amount of concurrent delay?
Where the cause of a delay is concurrent, in that both the employer’s

Under common law, the employer is entitled to claim general
delaying event and the contractor’s delaying event occurred
damages upon proof of actual loss which it suffered due to the
simultaneously, there would be a need to analyse properly the various
contractor’s failure to complete the works on the date stipulated
factors at play, with regards to time of occurrence of the delay,
in the contract. Under some operative construction contracts,
duration of the delay and causation. In Nigeria, several methods
a pre-estimate of loss by the employer may be included in the
adopted from those used by the English and American courts, e.g.
event that the said contractor fails to complete the works on the
in the Henry Boot Construction (UK) Ltd. vs. Malmaison Hotel
stipulated completion date, provided in the contract as Liquidated
(Manchester) Ltd. and Smith vs. The United States of America, are
and Ascertained Damages (LAD). The employer is relieved from
gaining currency. These have the effect that, where the contractor
the burden of proving the actual loss or general damages for late
is delayed by two concurrent events caused by the faults of both the
completion by the contractor where LAD is provided in the contract.
employer and the contractor, the said contractor shall in all cases
LAD provisions state the rate of damages that the contractor is
be entitled to an extension of time. But whether the contractor is
liable to pay per day, week and month, of delay of the work beyond
entitled to monetary compensation will depend on whose fault or
the agreed date for completion. If an LAD clause in a contract is
risk was the dominant cause for the delay. It will, therefore, depend
successfully proven to be a penalty clause, it will be unenforceable
and invalid and the LAD clause will be rendered inoperative as on the facts, evidence and terms of the contract of the relevant case.
against the contractor. The employer must then submit a claim for
general damages.

3.5 If the contractor has allowed in his programme a 3.10 Is the contractor ever entitled to suspend works?
A contractor cannot, without appropriate notice to the architect/
entitled to an extension of time if he is then delayed engineer, suspend work, even where the employer has failed to pay
after this float is used up? in accordance with the contract’s terms.
The suspension of work by the contractor without due regard to the
Nigeria
Generally, it will depend on the form of construction contract in use contractual provisions may make it liable for breach of contract or
by the parties. Float belongs to the project and to whoever uses it delay. The time and manner in which a contractor may suspend
first. But the contractor would, in circumstances where an extension work is usually governed by the relevant provisions and terms of
of time cannot be granted and for the avoidance of liability for LAD, the contract.
request an appropriate extension of time, and compensation not
exceeding the float be given to it as a refund. It is suggested that the 3.11 On what grounds can a contract be terminated? Are
contractor should insert the float as a separate named activity or allot there any grounds which automatically or usually
more time than required for each activity. entitle the innocent party to terminate the contract?
expressly?
against each other? How long is that period and from Where the contract is breached, the innocent party is entitled to
what date does time start to run? terminate the same. The contract may, however, stipulate the
grounds upon which the innocent party may terminate the contract,
In Nigeria, claims that arise from contract are subject to a time bar especially after an opportunity has been given to the party in breach
(see S. 7(1) (a) and (b) of the Limitation Act, Cap. 522 LFN Vol. to remedy the same.
3). Actions that are founded from the contract are not actionable,
unless brought within six years of the date on which the cause of 3.12 Is the concept of force majeure or frustration known
action occurred. Action for breach of contract should be initiated in your jurisdiction? What remedy does this give
timeously, within six years of the occurrence of the said breach, or the injured party? Is it usual/possible to argue
the claimant would lose its right of action against the party in breach successfully that a contract which has become
due to the time bar. uneconomic is grounds for a claim for force majeure?
The concept of “force majeure” is well recognised under Nigerian

law and such force majeure events include war, flood, civil unrest,
conditions?
inclement weather, etc. A force majeure event is an event which may
happen in the course of the contract that generate circumstances that
This can be determined in the contract. But generally in law, save for may hamper the performance of the contract. Force majeure entitles
any term to the contrary, the contractor bears the risk of unforeseen the party relying on it to extended performance of the contract. A
ground conditions. It is commonly expected that the construction contract which has become uneconomic cannot sufficiently ground
contract states who bears what risk. Quite often, the procurement a claim of force majeure in order to be excused from the obligations
methods adopted help in apportioning risks appropriately, while in the contract.
being mindful of the principle that risk should be allocated to the
party most able to bear it.
3.8 Who usually bears the risk of a change in law for their benefit? E.g. is the second or subsequent
affecting the completion of the works? owner of a building able to claim against the original
The contract, of course, will specifically indicate which party bears
the risk of a change in law affecting completion. However, it is an Under the common law privity of contract doctrine, a contract
implied term in the construction contract that the contractor must does not confer any benefit or impose obligations on non-parties to
adhere and comply with extant laws and regulations applicable to the contract. However, there are exceptions to the general rule of
its operation. In the absence of an express provision in the contract privity of contract doctrine, whereby, under a construction contract,
specifying who bears what risk, each party in the contract will be a third party could benefit under the contract. A collateral warranty
responsible for complying with the obligations of the law pertaining provides for an extra-contractual facility, which gives rights to a
to it. third party under the contract.
3.9 Who usually owns the intellectual property in relation 3.14 Can one party (P1) to a construction contract which
to the design and operation of the property? owes money to the other (P2) set off against the sums
The employer pays for and obtains ownership of all intellectual
property severally developed by the architect/designer or contractor
for the execution of the project, provided that the contract did not Set-off is a term well recognised under Nigerian law. Where two
specify otherwise. parties are both indebted to each other, one debt can set off the other.
However, both debts claimed by the two parties must be in the form
of a liquidated money demand. There is no set-off right against
future debt or debt which is still contested.

However, the mutual demand for speed, cost-effectiveness,

3.15 Do parties to construction contracts owe a duty of preservation of relationships and maintenance of privacy needed
care to each other either in contract or under any in the resolution of construction contract disputes often informs
whether, mediation, amicable settlement or arbitration would be
chosen. Parties are bound by their preferred or chosen methods for
In the Nigerian courts, the test of foreseeability is applied to the resolution of disputes arising from construction contracts.
determine whether a duty of care exists in order to hold the negligent
party liable. The terms of the contract would specify whether there
Nigeria
is a contractual duty of care on the parties. 4.2 Do you have adjudication processes in your
procedures.
ambiguous, are there rules which will settle how that Yes. Adjudicatory processes are available for resolutions of
construction contract disputes in Nigeria, but are sparingly
deployed. The adjudication method of choice is contractually
Yes. The Nigerian Courts would perforce apply the “literal rule” of included in the standard form of construction contract as there is no
interpretation in construction contracts, to give every word in the statute governing adjudication in Nigeria. The appointment of the
document its ordinary grammatical meaning, without any addition, adjudicators is made jointly by the employer and the contractor and
subtraction or extension of the meanings, unless doing so would named in the Special Conditions of Contract (SCC). Since there is
lead to absurdity, and negate from the intention of the parties or no legislation governing adjudication in Nigeria, all incidences of
render the document manifestly ambiguous. In such instance, the adjudication operate contractually in accordance with the relevant
“golden rule” of interpretation would be applied to provide the forms of construction contract, e.g. the GCC Form. The procedures
contextual meaning and purpose for every provision in the contract are therefore as provided in the said agreements.
and the background facts surrounding the agreement. In addition,
the contra proferentem rule can also be applied to interpret an
incurably ambiguous provision in the contract against the author of 4.3 Do your construction contracts commonly have
the contract.
3.17 Are there any terms in a construction contract which Arbitration as a method of dispute resolution is the most preferred
are unenforceable? mechanism for the resolution of disputes in the construction industry
in Nigeria. Arbitral services and proceedings are constituted in
The Nigerian Courts will not enforce contracts whose terms would accordance with the Arbitration and Conciliation Act, 1988 with
produce any unlawful purpose or one which is contrary to public rules made pursuant thereto, the several multi-door courthouses, the
policy. International Centre for Arbitration and Mediation in Abuja, and the
Lagos Regional Centre for International Commercial Arbitration,
3.18 Where the construction contract involves an element etc. The particular standard form of construction contract used
of design and/or the contract is one for design only, provides: the processes for referrals to arbitration; the number
are the designer’s obligations absolute or are there of arbitrators; the qualification that the proposed arbitrator must
limits on the extent of his liability? In particular, does possess; the appointing authority, if the parties did not agree on
the designer have to give an absolute guarantee in an arbitrator; and the applicable law that would govern the arbitral
proceedings.
To properly situate the obligations or liabilities of the designer in a

construction contract, the terms of the contract must be considered. 4.4 Where the contract provides for international
In a typical build contract, the design is undertaken by a professional
(an architect/engineer) and it is implied in a contract that such a advise of any obstacles to enforcement.
professional will deploy the utmost care, skill and expertise in
carrying out his obligations under the contract. In relation to this,
Nigeria has domesticated the Convention on the Recognition and
a designer may be found to owe a “fit for purpose” obligation.
Enforcement of Foreign Awards (the New York Convention) and
However, onerous responsibilities in respect of the construction
has ratified the same. Thus, foreign arbitral awards in international
is placed on the contractor, who impliedly must be found to have
commercial disputes are enforceable and regarded as res judicata
undertaken to provide works that are fit for purpose, and in that
by the courts, except where its enforceability is hampered by public
regard the contractor’s obligations are quite absolute. This is often
policy considerations.
not the case for the designer. The designer may only be liable for
negligence, where the design is found to be defective.
4 Dispute Resolution court be upheld and enforced in your jurisdiction?
By virtue of the combined interpretation of the Foreign Judgement

(Reciprocal Enforcement) Act, Cap. F35 LFN 2004 and the
Reciprocal Enforcement of Judgements Ordinance, Cap. 175 LFN
In general, disputes between parties are mostly resolved, unless 1958, foreign judgments may be upheld and enforceable in Nigeria
consensually settled, by adjudication. The major adjudicatory if the judgment is first registered in a court in Nigeria. Judgments
methods include litigation, arbitration, etc., whilst the consensual are enforceable provided that the said judgment sought to be
methods are mainly negotiation, mediation, conciliation, etc. enforced in Nigeria is:

(a) the judgment of a superior court in the foreign country, which for specific performance are, by the rules of the relevant State
has reciprocal treatment of judgments with Nigeria; and High Court, instituted in the High Court where the contract ought
(b) a monetary judgment which is final and conclusive between to have been performed or where the defendant resides or carries
the parties. on business. Final decisions from courts of first instance up to the
Under the ordinance, the application for leave to register the said appeal court can last for a span of 10 years in Nigeria. That is why
foreign judgment in Nigeria must be brought within 12 months of alternative dispute resolution is strongly advised in construction
the date the judgment was delivered in the foreign court. Once disputes. However, proceedings which are commenced by an
Nigeria
registered, it then becomes a judgment of the High Court and can uncontested summary summons/undefended writ procedure may be
become enforceable via a certificate issued in accordance with the determined within a period of 12 months.
Sheriffs and Civil Process Act, C6, LFN 2004.
4.6 Where a contract provides for court proceedings in Patrick Abuka

your jurisdiction, please outline the process adopted, Abuka & Partners, Legal Practitioners
any rights of appeal and a general assessment of Western House 10th Floor
how long proceedings are likely to take to reduce: (a) 8–10, Broad Street, P.O. Box 7022
a decision by the court of first jurisdiction; and (b) a Lagos
decision by the final court of appeal. Nigeria
Tel: +234 803 305 4371 / 805 236 3930

Court proceedings in Nigeria are, according to the rules of the Email: abukapc@yahoo.com
patrick.abuka@abukapartners.com.ng
relevant court, initiated by way of writ of summons and/or
URL: www.abukapartners.com.ng
originating summons. Cases on liquidated money demands can
be brought under summary summons (undefended list procedure), Founding and Managing Partner, Abuka & Partners, Legal Practitioners.
Admitted in 1974 as a Solicitor and Advocate of the Supreme Court of
accompanied by an application for summary judgment. There is no
Nigeria. Education: the University of Ife; the University of Lagos, and
specialised court for construction matters in Nigeria, but actions for the Nigerian Law School (LL.B. Hons., 1973; B.L., 1974; M.B.A., 1975;
interpretation of a contract or to construct the terms of a contract LL.M., 2000). Lecturer, M.B.A. Class, University of Lagos, 1976–1978.
document may be instituted by originating summons (Order 2, Rule Member: Nigerian Bar Association; International Bar Association;
2, FCT High Court Rules, 2004). Appeals of decisions of the High American Bar Association (International Associate Member); the Lagos
Chamber of Commerce; Nigerian-American Chamber of Commerce,
Court go up to the Court of Appeal and may finally go on to further Hon Life Vice President, Nigerian-British Chamber of Commerce;
appeal in the Supreme Court. Disputes emanating from construction Nigerian-German Business Association. Languages: English.
contracts with regard to breaches of contract or declaratory orders
Abuka & Partners, Legal Practitioners, was under the name and style Abuka Ajegbo Ilogu & Nwaogu. It was founded on 28th March, 1979 by the four
named partners, who had worked individually and separately until that date. The partners had been in the legal profession since 1970. Following a
restructuring of the law firm, we adopted the shorter and simpler name Abuka & Partners, Legal Practitioners.
Major Areas of Practice
■■ Trademarks.
■■ Oil & Gas.
■■ Corporate & Commercial.
■■ Maritime and Shipping.
■■ Financial Institutions.
■■ Litigation and Alternative Dispute Resolution.
■■ Real Estate.

Chapter 20
Norway Jacob F. Bull
Advokatfirmaet Thommessen AS Henrik Møinichen
including the follow-up of design work during the construction

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

Advokatfirmaet Thommessen AS Norway
party’s act of quasi ex contractu (a certain type of behaviour), or if

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

employer may withhold payment if the employer has legitimate the employer. However, the third party would possibly have some
claims against the contractor. fiduciary duties towards the contractor and may not act in “bad faith”
or in a “blameworthy” manner towards the contractor. The standard
NS 8403:2005 General conditions of contract for construction
bonds (provided by banks and others) to guarantee supervision commissions is often used for supervision contracts.
Norway

and guarantees?
It is common for the contractor to be required to provide the paid” clause?
employer with a performance bond to guarantee the correct
performance of contractors’ obligations under the contract, and Yes, the parties may agree to include a “pay when paid” clause in
also a parent company guarantee in the event the contractor is the the contract. However, it cannot be excluded that a “pay when paid”
subsidiary of another company. There are no general restrictions on clause may on some occasions be deemed “highly unreasonable”
the nature of such bonds and guarantees, provided that the contract and consequently set aside or modified by a Norwegian court.
is entered into between professional parties.
In accordance with NS 8407, the contractor shall provide the
employer with security for the performance of his contractual
obligations during the execution period and the guarantee period. paid by the contractor to the employer in the event of
The security during the execution period, including liability for particular breaches, e.g. liquidated damages for late
delayed completion, shall amount to 10% of the contract price. completion? If such arrangements are permitted, are
Upon take-over/delivery of the work, the security shall be reduced there any restrictions on what can be agreed? E.g.
to 3% of the contract price in respect of any guarantee claims for a does the sum to be paid have to be a genuine pre-
period of three years. The security shall be provided in the form of estimate of loss, or can the contractor be bound to
an ordinary bank guarantee (not an on-demand guarantee) from a
bank, insurance company or other financial institution. However, in
construction and supply contracts we often see that an on-demand
guarantee is still required. The parties are free to agree on liquidated damages in the event
of particular breaches, including in case of delay, and there are
no mandatory requirements or general restrictions with respect to
1.8 Is it possible and/or usual for contractors to have liquidated damages between professional parties. Consequently, the
contractor can be bound to pay a sum which is wholly unrelated to
contractors to claim that until they have been paid the amount of financial loss suffered.
they retain title and the right to remove goods and However, a “highly unreasonable” liquidated damages clause may
materials supplied from the site? be set aside or modified by a Norwegian court.
In accordance with NS 8407, the contract work shall become the

property of the employer progressively as the work is performed. 3 Common Issues on Construction
Materials delivered to the project site and which are to be Contracts
incorporated into the contract object become the property of the
employer upon payment. Materials delivered by the employer shall
remain the property of the employer. 3.1 Is the employer entitled to vary the works to be done
The parties may agree that the contractor retain title and the right to
remove goods and materials from the site. However, the contractor
In accordance with NS 8407 (and NS 8405), the employer is entitled
is in principle not entitled to invoke retention rights towards the
to vary the works to be done under the contract. A variation to the
employer’s creditors with respect to materials, etc., which have been
incorporated into the main object. work must be sufficiently connected to the contract in question and
must not be of a materially different nature to the originally agreed
work. Unless otherwise agreed, the employer is not entitled to
2 Supervising Construction Contracts order the contractor to make changes representing an addition to the
contract price of more than 15%.

supervised on behalf of the employer by a third 3.2 Can work be omitted from the contract? If it is
party? Does any such third party (e.g. an engineer omitted, can the employer do it himself or get a third
or architect) have a duty to act impartially between party to do it?
it only one which exists in certain situations? If so,
According to NS 8407, parts of the work can also be omitted from
please identify when the architect/engineer must act
impartially. the contract. If it is omitted, it is somewhat uncertain whether
the employer may get a third party to perform the work. In our
opinion, the employer would in most instances not be entitled to
Some construction contracts are supervised on behalf of the
issue a negative variation order (omit work from the contract) if the
employer by a third party. Such an engineer or architect would not
intention is that the employer wishes to transfer parts of the scope of
have a particular duty to act impartially between the contractor and
work to another contractor.

to have become aware, of the circumstances which form the basis

3.3 Are there terms which will/can be implied into a for the variation order request.
Further, if the contractor receives a rejection in response to a variation
order request, including a demand for an extension of time and/or
Subject to certain exceptions, the Norwegian background law (both
adjustment of the contract price, then the contractor must take the
general contract law and construction law) would only apply as a
necessary steps to initiate ordinary court or arbitration proceedings
“gap-filler” to the extent legal questions have not been regulated in
no later than eight months after take-over of the contract work.
Norway
the contract. Further, in contrast to, for example, English contract
law, the judge or arbitrator would not necessarily be bound “by The contractor shall issue a final account proposal and the final
the four corners” of the contract, but use the background law in its invoice within two months after take-over. If the contractor fails
interpretation of the contract. to do so, the employer is entitled to set a final deadline, which shall
not be shorter than 14 days. If the contractor fails to submit the final
account, then he loses (with certain exceptions) the right to make
3.4 If the contractor is delayed by two events, one the any claims in connection with the contract against the employer.
his employer, is the contractor entitled to: (a) an It should also be noted that any claims may become time-barred in
extension of time; or (b) the costs occasioned by that accordance with the Norwegian Limitation Act, regardless of the
concurrent delay? agreed mechanisms in the contract. Claims will in general be time-
barred three years after the date on which the creditor first had the
In the case of concurrent delay, the contractor would be entitled to right to demand performance.
an extension of time equal to the parts of the delay that may be Further, according to NS 8407, the employer must present guarantee
attributed to fault of the employer, provided that the fault of the claims without undue delay and within five years after take-over at
employer impacts the “critical path”. If the contractor is delayed as the latest (guarantee period).
a result of two events/faults occurring in parallel, and 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 rule not be entitled to an extension
conditions?
of time.
As to the costs incurred by the contractor, the employer would only According to NS 8407, the employer bears the risk for unforeseen
be liable for increased costs which may be attributed to a fault or ground conditions if they deviate from what the contractor had
risk of the employer. If there are two faults occurring in parallel, reason to expect when preparing its tender. However, the contractor
and the costs would have occurred regardless of the employer’s is obliged to take into account all available information in connection
fault, the contractor would as a main rule not be entitled to the costs with the preparation of its tender as further detailed in the standard
occasioned by that concurrent delay. contract.
3.5 If the contractor has allowed in his programme a 3.8 Who usually bears the risk of a change in law
period of time (known as the float) to allow for his own affecting the completion of the works?
entitled to an extension of time if he is then delayed According to NS 8407, the employer bears the risk of a change in
after this float is used up? law affecting the performance of the works. The contractor must
notify the employer thereof without undue delay. However, this
Whether the employer or the contractor “owns the float” is an only applies if the contractor could not have been expected to take
ongoing discussion in Norwegian legal theory, and there is no into account such changes to laws and regulations at the time the
decisive or clear court practice with an answer to this legal problem. tender was submitted and could not have been expected to avoid the
consequences.
The main view in legal theory related to onshore contracts is that the
contractor owns the float, i.e. the contractor is entitled to an extension
of time if he is subsequently delayed after the employer has used 3.9 Who usually owns the intellectual property in relation
up the float. However, it is difficult to establish general principles to the design and operation of the property?
regarding this legal problem and the courts tend to solve it on a case-
by-case basis without addressing the “ownership” of the float. Unless otherwise agreed, the employer shall only be entitled to
use the design work for the completion of the project, subsequent
3.6 Is there a limit in time beyond which the parties to operation, maintenance, alterations or extensions. All other rights
a construction contract may no longer bring claims to the design work shall continue to be held by the party that has
against each other? How long is that period and from prepared the design work.
NS 8407 includes certain time limits that the parties must respect. If
a party fails to submit a claim within such time limits, then the party
According to NS 8407, the contractor is entitled to suspend
loses its claim against the other party.
performance of the work if the employer is in substantial breach
With regard to variation orders and variation order requests, the of its payment obligation or if it is evident that such breach will
standard sets out several strict time limits. The main rule is that occur. The contractor must notify the employer of such suspension
the contractor is obliged to submit a variation order request to the in writing 24 hours in advance.
employer “without undue delay” after he becomes aware, or ought

3.11 On what grounds can a contract be terminated? Are 3.13 Are parties which are not parties to the contract
there any grounds which automatically or usually entitled to claim the benefit of any contract right
entitle the innocent party to terminate the contract? which is made for their benefit? E.g. is the second or
Do those termination rights need to be set out subsequent owner of a building able to claim against
expressly? the original contracts in relation to defects in the
building?
According to NS 8407, a party is entitled to terminate the contract if
Norway
the other party has substantially breached its contractual obligations, In accordance with general principles of Norwegian contract law,
which corresponds with general principles of Norwegian contract a third party may be entitled to claim the benefit of a contractual
law. In addition, a party is entitled to terminate the contract if it right which is made for its benefit, i.e. that a contract may grant a
is evident that a substantial breach will occur. However, the party third party rights, but in general not impose any obligations on any
in breach shall be given a reasonable deadline for remedying the third party. This must be assessed based on an interpretation of the
matter before termination can be implemented. relevant contract.
Further, a party is entitled to terminate the contract if the other Further, a contracting party may, unless agreed otherwise, assign its
party goes bankrupt or becomes insolvent. However, the employer contractual rights (but not obligations) to a third party without the
shall not be entitled to terminate the contract if it is proven that the other party’s consent.
work will be completed in accordance with the contract. Nor shall A second or subsequent owner of a building is, in most cases,
the contractor be entitled to terminate the contract if satisfactory regardless of whether a claim or right has been transferred to such
security is provided for the timely performance of the remaining subsequent owner, entitled to make claims for defects against the
part of the employer’s obligations under the contract. contractor in accordance with the original contract. However, the
Except as stated above, NS 8407 does not include any grounds which contractor may with, except for mandatory consumer legislation,
automatically entitle the innocent party to terminate the contract. invoke any limitations of liability, etc. under its contract with the
employer against the second or subsequent owner of the building.
A party must terminate the contract by submitting a written
declaration to the other party.
3.12 Is the concept of force majeure or frustration known due to P2 the sums P2 owes to P1? Are there any
in your jurisdiction? What remedy does this give limits on the rights of set-off?
uneconomic is grounds for a claim for force majeure? The right of set-off of a counterclaim against a primary claim is
recognised under Norwegian law when the following general
conditions are fulfilled:
The concepts of both force majeure and “frustration” (known as
“failed contractual assumption” or “breach of expectations”) are, (i) the primary claim and the counterclaim must exist between
subject to certain conditions, recognised in accordance with general the same parties (except in cases of “connexity”, i.e. claims
arising out of the same contractual relationship);
principles of Norwegian contract law.
(ii) the primary claim and the counterclaim must be of the same
In accordance with NS 8407, the parties are entitled to an extension of nature;
time if the progress of their obligations is hindered by circumstances
(iii) the time of discharge of the primary claim must have
outside their control, such as extraordinary weather conditions,
occurred; and
orders or prohibitions by public authorities, etc. However, a party
(iv) the counterclaim must be due and payable.
shall not be entitled to an extension of time in respect of hindrances
which the party should have taken into account when the contract A set-off must be declared. A written notice would be preferable,
was entered into or the party could reasonably have avoided or but there are no strict form requirements under Norwegian law.
overcome the consequences of such occurrences. The parties are
not entitled to any compensation as a result of force majeure. 3.15 Do parties to construction contracts owe a duty of
In accordance with Norwegian case law, the contractor’s risks (and care to each other either in contract or under any
in principle the employer’s risks as well) are limited according to other legal doctrine?
the doctrine of “failed contractual assumptions”. In order for a
party to succeed with a claim based on this doctrine, the assumption According to NS 8407, both parties have a duty to cooperate and
must have been a determining element in the contract (fundamental show loyalty during the performance of the contract, which is in
assumption), and the other party must have been aware of the line with the general principles of Norwegian contract law. A breach
assumption. In addition, the assumption must be deemed “relevant”, of a party’s fiduciary duties may, inter alia, result in liability for
which depends on an overall assessment as to what party should damages and loss of rights under the contract.
carry the risk for the unexpected development.
Based on the above rules, it is not usual and it must be deemed 3.16 Where the terms of a construction contract are
extremely difficult, to argue successfully that a contract which has ambiguous, are there rules which will settle how that
become uneconomic is a ground for claiming force majeure or a ambiguity is interpreted?
ground for claiming compensation for increased costs, etc.
When interpreting a construction contract, the judge’s aim is to
determine the meaning intended by the parties. A basic principle of
interpretation of contracts is that an agreement must, regardless of
the wording, be interpreted in accordance with the joint 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 4.3 Do your construction contracts commonly have
wording is unclear and other relevant circumstances (previous arbitration clauses? If so, please explain how
negotiations, subsequent conduct, the purpose, etc.) are insufficient
to conclude on the interpretation issue, then the contract will often
be interpreted against the interests of the party who provided the According to NS 8407, disputes shall be settled by ordinary court
wording (contra proferentem doctrine). proceedings unless it has been agreed to refer disputes to arbitration.
Norway
However, arbitration is often used as a dispute resolution mechanism
in construction contracts in Norway.
are unenforceable? The Norwegian Arbitration Act is based on the UNCITRAL Model
Law on International Commercial Arbitration, follows the Model
Law closely in structure and content, and can be considered as a
The Norwegian standard construction contracts do not include terms
national implementation of the Model Law, with certain variations.
which are unenforceable.
Generally, and as the main rule, parties are free to agree on the terms
governing the arbitration proceedings. The Arbitration Act only
contains some few mandatory provisions.
are the designer’s obligations absolute or are there Section 20 of the Arbitration Act, corresponding to Article 18 of the
limits on the extent of his liability? In particular, does Model Law, confirms that the parties must receive equal treatment
the designer have to give an absolute guarantee in at every stage of the arbitral proceedings.
Section 20 also adopts the principle that both parties are fully
entitled to present their cases. It is emphasised in section 28 that the
In construction contracts which involve an element of design
parties are responsible for clarifying the facts of the case and that
and/or the contract is for design only, the designer has in general
undertaken an obligation as to the result, which may be characterised they are entitled to present such evidence as they wish. Under this
as “absolute”, i.e. the contractor is responsible for the delivery of a section, the arbitral tribunal may, however, refuse to accept evidence
contract object in line with the terms and conditions of the contract. which is clearly not relevant and also, to some extent, based on
proportionality.
The designer is not obliged to give absolute guarantees in respect
of his work. In accordance with the principle of contractual The Arbitration Act only specifies a few procedural rules. To the
freedom, the parties may agree on whatever terms, including limited extent that neither of the parties have agreed on what shall apply
guarantees/warranties. in other respects, the tribunal may apply the rules it considers
According to NS 8407, the guarantee period is set to five years from appropriate.
take-over of the contract object and the contractor is in principle not The principle of orality (i.e. that the parties, their counsel and
liable for the employer’s consequential losses. witnesses must express themselves orally before the court) and the
In NS 8401 (standard contract for design only), the contractor’s liability principle of immediacy (i.e. that all evidence must be presented
for damages is, unless otherwise agreed, limited to approximately before the court that is to render the judgment) are fundamental
MNOK 5.5 for liability which is not covered by insurance, and principles in legal proceedings in the ordinary courts of Norway. In
approximately MNOK 14 for liability covered by insurance. arbitration, these principles are not given the same prominence, but
are to a considerable extent adopted in most arbitral proceedings.
The provisions of sections 12 and 13 of the Arbitration Act
concerning the appointment of arbitrators correspond to a great
extent, in terms of their content, to Articles 10 and 11 of the Model
4.1 How are disputes generally resolved? Law. Thus, the parties are free to determine the appointment
procedure. The speed at which the tribunal can be set up depends
Disputes arising in connection with a construction contract, and on the parties, as long as they agree. The Arbitration Act provides
which are not resolved by mutual agreement, are normally settled that the parties must, to the greatest extent possible, jointly appoint
by ordinary court proceedings at the agreed legal venue (or the right the arbitral tribunal. This will, at the outset, place an obligation on
legal venue in accordance with Norwegian procedural legislation) the parties to spend some time ascertaining whether they can reach
unless the parties agree otherwise, e.g. arbitration. an agreement on a joint appointment.
According to NS 8407, the parties may, unless agreed otherwise If the parties are unable to agree on who should be appointed, the
and until take-over, also demand that a dispute be determined by appointment procedure is in essence similar to that provided in
an umpire (temporary dispute resolution). Such decision shall be Articles 10 and 11 of the Model Law: unless otherwise agreed, the
binding on the parties if the parties fail to bring an umpire decision tribunal shall consist of three arbitrators. Each party must appoint
before a court or arbitration tribunal within six months of the date an arbitrator within one month of being requested to do so by the
of the decision. other party. These two arbitrators shall thereafter together appoint
the presiding arbitrator within one month.
4.2 Do you have adjudication processes in your If a party fails to act as required under the applicable appointment
jurisdiction? If so, please describe the general procedure, if the two party-appointed arbitrators are unable to reach
procedures.
agreement on the third arbitrator, or if an appointing body fails to
act as provided, each of the parties may under section 13 (4) of the
In Norway, we do not have an adjudication process. However, Arbitration Act request the relevant district court to appoint the
there is voluntary court-administered mediation. The purpose of remaining arbitrator(s).
such mediation is that the parties, with the collaboration of a judge
(mediator), try to solve the dispute amicably.

Arbitration awards are not subject to any appeal. The only recourse contract shall be solved by court proceedings abroad, then the
against an arbitral award is to bring an action before the courts judgment will in principle be enforceable in Norway.
claiming the setting aside of the award.
4.4 Where the contract provides for international your jurisdiction, please outline the process adopted,
arbitration, do your jurisdiction’s courts recognise any rights of appeal and a general assessment of
and enforce international arbitration awards? Please how long proceedings are likely to take to reduce: (a)
Norway
advise of any obstacles to enforcement. a decision by the court of first jurisdiction; and (b) a
Pursuant to section 45 (1) of the Arbitration Act, an arbitration award

The main elements of ordinary court proceedings in Norway may be
shall be recognised and enforceable, irrespective of the country in
summarised as follows:
which it was made. This means that arbitration awards made in
countries not party to the New York Convention are also recognised ■ Before the plaintiff files the writ of summons to the court, the
and enforceable in Norway. plaintiff must notify the defendant in writing that the plaintiff
is considering initiating court proceedings.
However, for an arbitral award to be recognised and enforced,
■ The case commences when the plaintiff files a writ of
certain conditions have to be met, cf. section 45 (2) of the Arbitration summons to the court of first instance (city court). The writ
Act. A party has to make available the original arbitration award or shall state the claims invoked by the plaintiff and set out the
a certified copy of the award. If the arbitral award has not been factual and legal assertions on which the claims are based.
made in one of the Scandinavian languages (Norwegian, Swedish or In addition, the evidence on which the plaintiff wishes to
Danish) or in English, the party must also make available a certified rely must be submitted, but additional evidence may also be
translation of the arbitration award. presented at a later stage.
The court (or administrative agency) may also request the existence ■ Thereafter the defendant will be given a deadline (usually
of an arbitration agreement to be proved. three weeks) for submitting a reply.
■ Thereafter, further communication with the court and the
Regardless of whether an arbitral award is recognised and
other side, including the submission of additional arguments
enforceable, recognition and enforcement may, however, be refused
and evidence, is carried out by submitting written pleadings.
pursuant to section 46 of the Arbitration Act. This provision
■ An oral hearing shall in principle be held within six months
corresponds to a large extent to Article 36 (1) of the Model Law and
from the date on which the writ of summons was filed. In
Article V of the New York Convention.
practice, the scheduling of the hearing depends on the
Pursuant to section 46 (1) of the Arbitration Act, recognition or workload of the court as well as the complexity of the case.
enforcement may be refused at the request of the party against whom ■ The hearing is divided into three parts: the opening arguments
it is invoked, if that party furnishes evidence that one of the parties (where written evidence is normally presented); the evidence
to the arbitration agreement lacked legal capacity or the arbitration (party and witness testimonies); and the closing arguments.
agreement is not valid. Such refusal may also result where certain ■ The court shall render the judgment within two weeks from
procedural errors – concerning notice to the parties, jurisdiction of the date on which the hearing was adjourned (four weeks
the tribunal, etc. – have been made. if there is more than one judge), but the deadline is often
The court (or the administrative agency) shall, pursuant to section postponed. The judge will normally indicate when the
judgment can be expected at the end of the hearing.
46 (2) of the Arbitration Act, of their own accord refuse to recognise
and enforce an award if the dispute could not be settled by arbitration ■ The parties have the right to appeal. The deadline for appeal
under Norwegian Law or if recognition and enforcement would be is one month from the day that the judgment is served. The
court of appeal may refuse leave to appeal against a judgment
contrary to “ordre public”.
if it finds it clear that the appeal will not succeed. However,
only on rare occasions does the court of appeal refuse to hear
4.5 Where the contract provides for court proceedings an appeal.
in a foreign country, will the judgment of that foreign ■ The hearing of the appeal will likely be held 6–12 months
court be upheld and enforced in your jurisdiction? after the appeal is submitted. The court of appeal shall in
principle render the judgment within four weeks from the
A judgment rendered by a foreign court will only be recognised as date on which the hearing was adjourned.
a final and enforceable judgment to the extent prescribed by law. In ■ A judgment rendered by the court of appeal may also be
accordance with the Norwegian Dispute Act, the Lugano Convention appealed to the Norwegian Supreme Court. However,
of 2007 between the EU and the EFTA-countries (including judgments cannot be appealed without leave. Leave can only
Norway) shall be deemed implemented into Norwegian law by be granted if the appeal concerns issues whose significance
way of incorporation, and Chapter III of the Lugano Convention extends beyond the scope of the current case, or if it is
important for other reasons that the case is determined by the
concerns recognition and enforcement of judgments. Consequently,
Supreme Court. In construction cases, it is extremely rare
judgments from countries party to the Lugano Convention of 2007
that the Supreme Court accepts to hear the appeal.
may be enforced in Norway. As for judgments from outside the EU,
Based on the above, we estimate that a judgment by the court
such judgments may be enforceable in Norway in accordance with
in the first instance may be delivered within 6–10 months
treaties between the states. after submission of the writ of summons. A judgment from
In addition, a foreign judgment is enforceable in Norway if the the court of appeal – which in most cases will be the “final
parties have agreed to refer disputes under a contract to a foreign court of appeal” – may thereafter be delivered within 7–12
court. Thus, if the parties agree that disputes arising out of the months of the submission of the notice of appeal.

Jacob F. Bull Henrik Møinichen

Advokatfirmaet Thommessen AS Advokatfirmaet Thommessen AS
Haakon VIIs gate 10 Haakon VIIs gate 10
Postboks 1484, Vika Postboks 1484, Vika
NO-0116 Oslo NO-0116 Oslo
Norway Norway
Norway
Tel: +47 23 11 11 56 Tel: +47 23 11 11 22
Email: jbu@thommessen.no Email: hem@thommessen.no
URL: www.thommessen.no URL: www.thommessen.no
Jacob F. Bull (Partner) heads the firm’s practice group for onshore Henrik Møinichen (Senior Associate) works within the firm’s practice
and offshore construction. He has extensive experience with areas of construction, oil and gas, oil service and shipping. Henrik has
construction projects both in Norway and abroad. Jacob provides been actively involved in several onshore and offshore construction
advice in all phases of a project, including preparation of the tendering projects, including assistance in preparing tender documents,
and negotiation strategy, participation in negotiations, follow-up and participation in negotiations and dispute resolution during project
handling of matters and claims during project execution and the execution and the warranty period. Henrik has recently assisted
warranty period. His name is often highlighted by international rating Norwegian and international clients in major litigations before ordinary
agencies. courts and arbitration proceedings and is currently involved in various
shipping disputes.
Thommessen is one of Norway’s leading commercial law firms with offices in Oslo, Bergen and London. The firm has 225 highly qualified employees,
including 170 lawyers covering the entire area of business law. With more than 150 years in business, Thommessen has consistently acted in the
largest and most complex matters seen in Norway and contributed to shaping the legal landscape. Bringing experience and innovation together,
the firm is well-placed to meet clients’ need for timely and bold advice. Thommessen is an independent law firm and has established relations with
highly regarded law firms all over the world. Thommessen places great emphasis on being a professional partner for its clients and on providing
independent advice of the highest professional and ethical standard.

Chapter 21
Poland Agnieszka Stankiewicz
Greenberg Traurig Grzesiak sp.k. Barbara Pancer
on both the form and the content of the construction contract, subject
to the general rules of the Polish Civil Code. No specific form is
required for a construction contract to be enforceable and binding.
1.1 What are the standard types of construction contract Only certain specific clauses need to be made in writing, e.g. the
in your jurisdiction? Do you have contracts which arbitration clause. It is common practice to include the contractor’s
place both design and construction obligations offer in the schedules to the construction contract; however, this is
upon contractors? If so, please describe the types of not mandatory.
have any arrangement known as management 1.3 In your jurisdiction please identify whether there is
contracting, with one main managing contractor a concept of what is known as a “letter of intent”, in
and with the construction work done by a series which an employer can give either a legally binding or
of package contractors? (NB For ease of reference non-legally binding indication of willingness either to
throughout the chapter, we refer to “construction enter into a contract later or to commit itself to meet
contracts” as an abbreviation for construction and certain costs to be incurred by the contractor whether
engineering contracts.) or not a full contract is ever concluded.
There is no market “standard” type of construction contract; however The Polish Civil Code provides only for the binding form of
the majority of construction projects are performed under one of an indication of willingness to enter into a contract, i.e. an offer.
the two following forms of cooperation between the employer and An offer constitutes a statement provided to the other party of
the contractor: (i) a general contractor contract; or (ii) management willingness to enter into a contract. The concept of a “letter of
contracting. Under the first form, the employer commissions all the intent” as a non-binding indication of willingness to enter into a
construction work to one contractor – the general contractor, who contract is known and used in Poland; however it is not a common
usually appoints subcontractors for specific parts of the scope of practice in the construction market.
work. Under the latter, the employer (usually in cooperation with a
contract manager) commissions specific parts of the scope of work
to several contractors. which it would be commonplace or compulsory to
A construction contract may cover both construction and design have in place when carrying out construction work?
works; however, usually the design works are commissioned to an For example, is there employer’s liability insurance
architect under a separate agreement. There is no standard form for contractors in respect of death and personal
of design agreement; however, a typical design agreement will
include provisions regarding: the scope of the design; the designer’s
remuneration; the designer’s liability; and the transfer of copyrights.
The market standard is that the contractor has the two following
The provisions relating to the transfer of copyrights should include
types of insurance in place: a construction all-risk insurance
the transfer of economic, derivative and moral rights and list the
(CAR); and third-party liability insurance. The above types of
fields of exploitation of the design.
insurance, however, are not a statutory obligation of the contractor.
Nevertheless, natural persons (construction managers) are required
1.2 Are there either any legally essential qualities needed by the binding law to obtain third-party liability insurance.
and intention to create legal relations), or any 1.5 Are there any statutory requirements in relation
specific requirements which need to be included in a to construction contracts in terms of: (a) general
construction contract (e.g. provision for adjudication requirements; (b) labour (i.e. the legal status of those
or any need for the contract to be evidenced in working on site as employees or as self-employed
writing)? sub-contractors); (c) tax (payment of income tax of
Under Polish law, there are no specific rules for the execution of
construction contracts and the general rules on the execution of A construction contract should comply with the general rules of civil
contracts (agreements) apply accordingly. The parties may decide law and must contain, inter alia, provisions on the scope of work and

Greenberg Traurig Grzesiak sp.k. Poland
remuneration and indicate the rights and obligations of the employer permit an obligation on the employer to appoint a supervision
and the contractor. It is not necessary to include provisions on either inspector (Polish: inspektor nadzoru budowlanego). In the above
labour or tax in the construction contract. As a rule, the contractor circumstances, a project management agreement is concluded.
should comply with health and safety regulations in the construction In the above situation, a construction manager and a supervision
process; however there is no obligation to list such obligations in the inspector (project manager) are representatives of the employer
construction contract. and they do not act impartially; usually there are no other impartial
entities involved in performing the construction contract.
Poland
the purchase price for the works as a retention to be 2.2 Are employers entitled to provide in the contract that
released either in whole or in part when: (a) the works they will pay the contractor when they, the employer,
are substantially complete; and/or (b) any agreed have themselves been paid; i.e. can the employer
defects liability is complete? include in the contract what is known as a “pay when
paid” clause?
Yes, the employer is permitted to retain part of the contract price
if the construction contract includes such a provision. As a rule, In accordance with the rule of “freedom of contracts”, such clauses
the parties agree on a percentage of the contract price as a retainer. are not forbidden; however, in practice, they do not exist in Poland.
This can be released either in whole or in part (usually after the
final handover). The parties may also include a provision allowing
the employer to retain amounts equal to the payments due to sum (known as liquidated damages) which will be
subcontractors from the contractor. paid by the contractor to the employer in the event of
1.7 Is it permissible/common for there to be performance there any restrictions on what can be agreed? E.g.
bonds (provided by banks and others) to guarantee does the sum to be paid have to be a genuine pre-
performance, and/or company guarantees provided to estimate of loss, or can the contractor be bound to
guarantee the performance of subsidiary companies? pay a sum which is wholly unrelated to the amount of
Are there any restrictions on the nature of such bonds financial loss suffered?
and guarantees?
The parties are permitted to agree in advance on a fixed sum of

Usually under a construction contract, the contractor is obliged to
liquidated damages for particular breaches. Usually the parties
provide the employer with bank guarantees serving as performance
agree on liquidated damages for a delay in the contract milestones
bonds, i.e. a performance bank guarantee for the period of the
and the handover, which are calculated as follows: number of days
construction works and a bank guarantee for the period of the
of delay multiplied by X% of the contract price. It is common that
statutory warranty and/or quality guarantee. Such guarantees must
the parties agree a cap on the aggregate amount of the liquidated
be issued in line with the banking law. The parties may decide on
damages in the form of a relevant part of the contract price (e.g.
specific provisions, the term and the issuer of the guarantees at
10%, 20%). The liquidated damages are not related to the amount
their discretion. Provision of a parent company guarantee is also
of the loss suffered by the employer. If the loss caused by a fault of
permissible if the parties so agree.
the contractor exceeds the cap on liquidated damages, the employer
may alternatively claim for remedy of the loss suffered in its full
1.8 Is it possible and/or usual for contractors to have amount. However, the employer may claim for remedy only if the
retention of title rights in relation to goods and parties included a relevant provision in the construction contract.
supplies used in the works? Is it permissible for Claiming for remedy is more complicated for the employer as it
needs to prove and justify the amount of its loss.
Such solutions are possible, i.e. the parties may include applicable Contracts
provisions in the construction contract; however, this is not practised
in the construction sector.
Yes, the employer is entitled to vary the works to be done under the
2.1 Is it common for construction contracts to be contract. Such a variation is usually agreed under a change order or
supervised on behalf of the employer by a third an annex to the contract. In such cases, however, the parties should
party? Does any such third party (e.g. an engineer agree on an extension of the time for completion and additional
or architect) have a duty to act impartially between remuneration for the contractor. There is no limit on this right.
please identify when the architect/engineer must act 3.2 Can work be omitted from the contract? If it is
impartially. omitted, can the employer do it himself or get a third
party to do it?
As a rule, construction works are managed by a construction
manager (Polish: kierownik budowy) appointed by the employer. If the contractor fails to perform part of the construction works and
In specific cases (i.e. justified by highly complex structures does not remedy this breach following the employer’s notice, the
or construction works or the anticipated impact on the natural employer is entitled to perform the relevant part of the construction
environment), the construction authority may include in the building works itself or commission performance of the construction works

to a third party (substitute performance). The parties may agree, in

an annex to the contract, to intentionally omit a certain part of the 3.8 Who usually bears the risk of a change in law
scope of work. affecting the completion of the works?
There is no rule regarding such situations and usually the parties

do not include relevant provisions in the construction contract.
Pursuant to the Polish Civil Code, if the performance of a contract
Poland
would entail excessive difficulties or expose one of the parties to

Pursuant to the “freedom of contract” rule, parties executing a
a serious loss (due to an extraordinary change in circumstances,
contract may arrange their legal relationship at their discretion as
i.e. a change in the law), the relevant court may (i) designate the
long as the content or purpose of the contract is not contrary to the
manner of performing the obligation, (ii) establish the value of the
nature of the relationship, the law or the principles of community
performance, or even (iii) decide that the contract be dissolved.
life; therefore a construction contract may include any and all
When dissolving the contract, the court may decide on the settlement
provisions, as long as they are not contrary to the nature of the
between the parties.
construction contract, the law or the principles of community life.

3.4 If the contractor is delayed by two events, one the to the design and operation of the property?
extension of time; or (b) the costs occasioned by that It is usually the employer who owns the intellectual property in
concurrent delay? relation to the design and operation of the property after the contract
is completed. The construction contract should contain the relevant
In such a situation, the contractor will only be obliged to pay the clauses allowing for the transfer of full economic copyrights in
employer liquidated damages for the days of the delay caused by favour of the employer.
the fault of the contractor. A time extension (and/or additional
remuneration) is possible only if the delay is caused by reasons 3.10 Is the contractor ever entitled to suspend works?
attributable to the employer.
The contractor is entitled to suspend works in case of the emergence
3.5 If the contractor has allowed in his programme a of a force majeure event or if this is included in the construction
period of time (known as the float) to allow for his own contract. Usually the parties define the term force majeure or list
delays but the employer uses up that period by, for the typical force majeure events in the contract. The contract may
entitled to an extension of time if he is then delayed also provide for additional cases when the contractor is entitled
after this float is used up? to suspend works, e.g., delays in payments of the contractor’s
remuneration by the employer.
Each variation ordered by the employer has to be agreed under an
annex or a change order. Under the annex/change order, the parties 3.11 On what grounds can a contract be terminated? Are
amend the contractual milestones so the variation cannot use the there any grounds which automatically or usually
float and cause the contractor’s delay. entitle the innocent party to terminate the contract?
expressly?
Under the provisions of the Civil Code, the employer is entitled to
what date does time start to run? rescind the construction contract without notice if the contractor
is late commencing or finishing the works to the extent that it is
unlikely that the works will be completed at the agreed time.
Polish law provides for statutory prescription periods. With
Furthermore, until the construction works are finished, the employer
respect to a contractor’s claims for its remuneration, the statutory
may rescind the construction contract at any time by paying the
prescription period is three years. With respect to an employer’s
agreed remuneration. The parties may also include a contractual
claims, when the construction works are completed the employer (as
right of rescission in the contract; however, setting the final date
a rule) is entitled to exercise its rights arising from the (i) statutory
when rescission is possible is essential for the validity of such a
warranty, or (ii) quality guarantee. The period of statutory warranty
for construction works is five years commencing from the date of the clause.
final handover of the works. The period of the quality guarantee for
construction works is agreed by the parties to the contract. Usually 3.12 Is the concept of force majeure or frustration known
the parties agree on a five-year period commencing from the date in your jurisdiction? What remedy does this give
of the final handover of the works. The parties to the construction the injured party? Is it usual/possible to argue
contract may agree in the contract to broaden, limit or exclude the successfully that a contract which has become
contractor’s liability towards the employer stemming from the
statutory warranty or/and the quality guarantee.
The concept of force majeure is known in our jurisdiction. The term
force majeure is not defined by any statutory provisions; therefore
3.7 Who normally bears the risk of unforeseen ground it is usually defined or described in the contract. A force majeure
conditions?
claim may be pursued only if a force majeure event took place and
affected the claiming party. Construction contracts usually provide
Usually it is the employer who bears the risk of unforeseen ground for a rule under which the contractor (i) is entitled to suspend the
conditions; however, the parties may agree otherwise in the contract. performance of construction works for the period of the emergence

of the force majeure event, and (ii) is not liable for the delay in
the construction works caused by the force majeure event. The 3.18 Where the construction contract involves an element
parties to the construction contract may also decide upon additional
entitlements related to the emergence of force majeure events. limits on the extent of his liability? In particular, does
The Polish Civil Code does not provide for the institution of the designer have to give an absolute guarantee in
frustration; it does, however, provide for a similar institution, i.e. if respect of his work?
the performance of a contract would entail excessive difficulties or
Poland
expose one of the parties to a serious loss (due to an extraordinary It should be noted that, within the meaning of the Polish Civil
change in circumstances, e.g., a change in the law), the relevant Code, a contract for design works is a different type of contract
court may (i) designate the manner of performing the obligation, (ii) than a construction contract, so the rules described herein with
establish the value of the performance, or even (iii) decide that the respect to construction contracts do not apply to contracts only
contract be dissolved. Economic inefficiency may not be a ground for design works. The rules described herein refer, however, to a
for a force majeure claim. “design and build” contract. As a rule, after the completion of the
construction contract, the contractor is liable under the five-year
statutory warranty for defects (or under the quality guarantee, if
3.13 Are parties which are not parties to the contract provided by the contractor), including defects resulting from the
contractor’s design works. The parties to the construction contract
subsequent owner of a building able to claim against may, however, broaden, limit or exclude liability under the statutory
the original contracts in relation to defects in the warranty for defects.
building?
A third party may claim the benefit from a construction contract
only if the rights and obligations from the contract or the employer’s
rights arising under statutory warranty and/or guarantee were 4.1 How are disputes generally resolved?
transferred to that third party.
Disputes are resolved before competent common courts unless the
3.14 Can one party (P1) to a construction contract which parties to the construction contract include an arbitration clause
owes money to the other (P2) set off against the sums in the contract (or conclude a separate agreement on arbitration).
due to P2 the sums P2 owes to P1? Are there any Proceedings before Polish courts take place in two instances. If a
limits on the rights of set-off? party is dissatisfied with the verdict of the court of first instance, it
may appeal to the court of second instance.
Yes, a party to a construction contract is entitled to set off its
payment against payments due from the other party. The Civil 4.2 Do you have adjudication processes in your
Code provides for exceptions to the right to set-off; however, these jurisdiction? If so, please describe the general
exceptions do not in general apply to payments between the parties procedures.
to a construction contract.
No, there is no such procedure in our jurisdiction.
care to each other either in contract or under any 4.3 Do your construction contracts commonly have
other legal doctrine? arbitration clauses? If so, please explain how
Parties to construction contracts owe a duty of care (Polish:
należyta staranność) on the basis of the provisions of the Civil Arbitration clauses are sometimes included in construction
Code. However, the parties may decide on the definition and precise contracts; however, the majority of contracts remain subject to the
understanding of the term “duty of care” under the construction jurisdiction of common courts. For a construction contract to be
contract. subject to arbitration, it must include a clear and written arbitration
clause. Arbitration proceedings are regulated by the Civil Procedure
Code; however, the parties are entitled to modify certain statutory
ambiguous, are there rules which will settle how that provisions in the arbitration clause (or in a separate arbitration
ambiguity is interpreted? agreement). Usually in the arbitration clause the parties indicate the
relevant arbitration court and the arbitration is conducted under the
rules adopted by the given court. An award made by an arbitration
Under the Polish Civil Code, it is the common intention of the
court is valid and enforceable like a verdict of a common court;
parties and the aim of the contract that should be examined rather
however, it may be set aside by a common court in a separate
than its literal meaning.
proceeding instituted by one of the parties to the dispute. The Civil
Procedure Code provides for an exhaustive list of cases when an
3.17 Are there any terms in a construction contract which action to set aside an award of arbitration court may be filed.
are unenforceable?

As the case may be, some terms in a construction contract may be arbitration, do your jurisdiction’s courts recognise
found unenforceable by the relevant court; however, when executing and enforce international arbitration awards? Please
a contract, it is assumed by the parties that all the provisions of the advise of any obstacles to enforcement.
contract are fully enforceable.
Yes, the common courts recognise international arbitration awards

and issue declarations of enforcement of such awards. Common was issued in a case which falls under the exclusive jurisdiction of
courts will refuse to recognise or enforce an award or settlement Polish courts; (iii) a defendant who did not defend on the merits of
agreement made before an arbitral tribunal if: (i) the dispute the case was not duly served with a statement of claim in sufficient
cannot be resolved by arbitration in accordance with the law; or time to enable the defendant to arrange for a defence; (iv) a party
(ii) recognition or enforcement of an arbitral award or a settlement was deprived of the possibility to defend itself in the proceedings;
agreement made before an arbitral tribunal would be contrary (v) an action involving the same claim between the same parties
to the fundamental principles of the legal order of the Republic was brought before a court in the Republic of Poland before it was
Poland
of Poland (public policy clause). The court will also refuse to brought before a court of a foreign state; (vi) it is irreconcilable with
recognise or enforce an award issued abroad or a settlement an earlier final and non-appealable judgment of a Polish court or an
agreement made before an arbitral tribunal abroad if the party earlier final non-appealable judgment of a court of a foreign state
requesting the refusal demonstrates that: (i) there was no arbitration recognised in the Republic of Poland, given in a case involving
agreement or the arbitration agreement is invalid, unenforceable the same claim between the same parties; or (vii) such recognition
or no longer effective in accordance with the applicable law; (ii) would be contrary to the fundamental principles of the legal order of
the applicant was not given proper notice of the appointment of the Republic of Poland (public policy clause).
an arbitrator or of the arbitration or was otherwise deprived of the
right to present its case or respond to the other party’s case before
the arbitral tribunal; (iii) the award deals with a dispute that the your jurisdiction, please outline the process adopted,
arbitration agreement does not cover or contains a decision on a any rights of appeal and a general assessment of
matter that goes beyond the scope of such agreement, provided that how long proceedings are likely to take to reduce: (a)
if it is possible to separate the decisions on matters covered by the a decision by the court of first jurisdiction; and (b) a
arbitration agreement from the impugned ones, the court shall only decision by the final court of appeal.
set aside the impugned decisions and allow the others to stand; the
court shall not set aside an award on the grounds that it decided on Processes before common courts are instituted by a statement of
a matter not covered by the arbitration agreement if the party to the claim filed with the relevant court by the claimant. It is the claimant
arbitration failed to object to its inclusion; (iv) the composition of who has to provide evidence for the claim. A court proceeding ends
the arbitral tribunal or the arbitral procedure was not in accordance with a verdict. If a party is dissatisfied with a verdict, it may appeal
with the arbitration agreement or, failing such agreement, with the to the higher instance court. According to the information published
law of the state where the arbitration took place; or (v) the award by the Ministry of Justice, in 2017 court proceedings lasted, on
has not yet become binding on the parties or has been set aside average, five to six months in the first instance. There is no similar
or suspended by a court of the state in which, or under the law of data for appeal proceedings, but usually appeal proceedings last
which, that award was made. longer than proceedings before courts of first instance.

A judgment of a foreign state court issued in a civil matter is

recognised ex lege unless the following obstacles exist: (i) it is
not final and non-appealable in the state where it was issued; (ii) it

Agnieszka Stankiewicz Barbara Pancer

Greenberg Traurig Grzesiak sp.k. Greenberg Traurig Grzesiak sp.k.
ul. Książęca 4 ul. Książęca 4
00-498 Warsaw 00-498 Warsaw
Poland Poland
Tel: +48 22 690 6142 Tel: +48 22 690 6132

Fax: +48 22 690 6222 Fax: +48 22 690 6222
Poland
Email: stankiewicza@gtlaw.com Email: pancerb@gtlaw.com
URL: www.gtlaw.com URL: www.gtlaw.com
Agnieszka Stankiewicz is a partner in the real estate department of Barbara Pancer is a senior associate in the real estate department of
the Warsaw office of Greenberg Traurig. the Warsaw office of Greenberg Traurig.
She has over 20 years of professional experience in corporate finance Barbara has 15 years of professional experience. She focuses her
and real estate transactions. Her practice focuses on assisting a practice on the investment process, including sale agreements, EPC
variety of foreign and domestic investors in M&A, takeovers, joint and other construction contracts (also based on FIDIC templates),
ventures, corporate and organisational restructuring, acquisitions development and property management agreements and commercial
and divestments of real estate or real estate holding companies, the leases. She also advises on matters connected with the development
financing and refinancing of real estate acquisitions, forward purchase process, including planning, permit and construction issues. She has
and leaseback transactions, all aspects of real estate development broad experience in performing due diligence audits related to the
projects as well as the due diligence of companies and assets and the legal aspects of real estate in connection with the sale and purchase of
restructuring of their financial indebtedness. real estate, as well as for banks financing acquisitions or development
of real estate.
Agnieszka has been recognised as one of the leading lawyers in
Poland in various legal directories including Chambers Europe and Barbara has been involved in major real estate and infrastructure
EMEA Legal 500. She is also listed as a Who’s Who Legal expert in projects on the Polish market.
real estate.
She graduated from the Faculty of Law at Warsaw University. She
She graduated from the Faculty of Law at Warsaw University. She qualified as a legal advisor in 2012.
qualified as an advocate in 2001.
Greenberg Traurig is a law firm with over 2,000 attorneys, serving clients from 38 offices around the world. The Warsaw office has a professional
team of more than 100 lawyers and is highly ranked in all major practice areas.
Our real estate team consists of more than 40 top-rated specialists who cover a broad spectrum of core real estate and related practices, including
finance, corporate, M&A, tax and capital markets. This team is one of the largest real estate teams in Poland.
We provide a full-service real estate practice, from acquisition, tenant and landlord representation to assisting developers and lenders in seeking
to create new real estate development and finance concepts. We also handle dispute resolution arising out of real estate transactions. The team
benefits from the support of our market-leading real estate practice in the United States.

Chapter 22
Portugal António André Martins
FALM – Sociedade de Advogados, RL Joana Maltez
have any arrangement known as management For private construction contracts, there are no essential qualities or
contracting, with one main managing contractor formalities required for the contract to be legally binding. However,
and with the construction work done by a series in case of a dispute, the party relying on the contract must require
of package contractors? (NB For ease of reference legal proof of the existence of the said contract. Therefore, it is
throughout the chapter, we refer to “construction prudent to have some sort of acknowledgment from both parties that
the contract exists.
For public construction contracts, the public procurement procedures
One cannot speak about standard types of construction contract in are legally binding and are derived from European law. The
Portugal, but rather about common types of construction contract. procedures involve a large number of formalities and requirements
comprising both pre-adjudication and post-adjudication procedures.
In fact, there are no standard drafts adopted by the construction
sector. However, there are two main types of contract that are
usually adopted in construction projects both in the private and 1.3 In your jurisdiction please identify whether there is
public sector: Contrato de Empreitada por Preço Global; and a concept of what is known as a “letter of intent”, in
Contrato de Empreitada por Série de Preços. The first is a lump
sum contract where the price is fixed beforehand, and the latter is a enter into a contract later or to commit itself to meet
so-called “price series contract”, establishing a price for each type certain costs to be incurred by the contractor whether
of works, where the contractor is paid in accordance with the result or not a full contract is ever concluded.
of the works effectively carried out.
These two main types of contract were, until 2008, expressly In Portugal, civil law establishes the principle of freedom of contract,
provided in the national law. However, the Public Contracts Code, by means of which the parties, with respect to the imperative rules
approved by means of Decree-Law no. 18/2008 of 29 January, no foreseen in the law, are free to agree amongst themselves the
longer establishes a distinction between these two types of contract. contractual discipline by which they wish to abide. Nevertheless,
This matter is now subject to the liberty of the contracting parties. articles 224 and 230 of the Portuguese Civil Code expressly provide
Design and construction contracts are common in Portugal. These the possibility for any entity to give the other party indication of
contracts are in fact standard in certain areas, such as in PPP its will to enter into a contract. The law establishes that, unless
Agreements. otherwise specified, such offer is of an irrevocable nature.
With regard to management contracting, this has become quite

common in recent years due to the increase in outsourcing. Until a 1.4 Are there any statutory or standard types of insurance
few years ago, Portuguese law expressly provided for the existence which it would be commonplace or compulsory to
of the Empreitada por Percentagem (percentage contracting), by
means of which the contractor is paid a given agreed percentage for contractors in respect of death and personal
over the costs incurred. The position of the managing contractor is injury, or is there a requirement for the contractor to
recognised by national law. In public contracts, the percentage of have contractors’ all-risk insurance?
subcontracting may not be above 75%.
With respect to construction activity, the only insurance that
is mandatory is accident at work insurance. Such insurance is
necessary in accordance with Law no. 41/2015 of 3 June for any
contractor to be allowed to pursue its activity in Portugal.

FALM – Sociedade de Advogados, RL Portugal
However, there are also some situations where the contractor may to judicially execute such property with preference over any other
replace the need to prove its economic capacity to execute some kind common creditors, including mortgage creditors. However, the
of works with civil liability insurance of an amount equal to the cost contractor may not remove goods or materials supplied from the site,
of the works to be executed. In these situations, the contractor must as such goods or materials are considered to have been incorporated
have both accidents at work insurance and civil liability insurance. into the works and therefore transferred to the employee.
It is, however, usual for public and private employers dealing
with construction contracts to demand the existence of a more
Portugal
comprehensive insurance policy covering all of the relevant risks
(this is the case in situations where there is no legal obligation to
have civil liability insurance). 2.1 Is it common for construction contracts to be
supervised on behalf of the employer by a third
impartially.
Yes, it is common for construction contracts to be supervised by a

There are no general requirements that apply exclusively to
third party, acting on behalf of the employer. Such third party does
construction contracts. However, the contractor must be previously
not have a duty to act impartially, as they represent the employer.
authorised by the authorities to act as a constructor, pursuant to Law
no. 41/2015 of 3 June, and may not carry out works beyond the
limits of such authorisation. Employees must hold a valid work visa. 2.2 Are employers entitled to provide in the contract that
Decree-Law 273/2003 of 29 October also demands that a safety and they will pay the contractor when they, the employer,
health plan be included in any public or private offer, and such plan have themselves been paid; i.e. can the employer
must be included as an annex in public construction contracts. include in the contract what is known as a “pay when
paid” clause?
1.6 Is the employer legally permitted to retain part of Yes, “pay when paid” clauses are frequent in our jurisdiction, and
are often combined with “back-to-back” and “if and when” clauses.
defects liability is complete? 2.3 Are the parties permitted to agree in advance a fixed
Yes, the employer is allowed to retain part of the purchase price. paid by the contractor to the employer in the event of
In public contracts, there is usually a guarantee of 5% which is completion? If such arrangements are permitted, are
complemented by a retention of an additional 5% of the contract there any restrictions on what can be agreed? E.g.
price. This retention may be replaced by an alternative form of does the sum to be paid have to be a genuine pre-
guarantee. estimate of loss, or can the contractor be bound to
performance, and/or company guarantees provided to The parties are allowed to agree a fixed sum in advance. However,
guarantee the performance of subsidiary companies? a court may reduce, in accordance with the stipulations of the
Are there any restrictions on the nature of such bonds applicable law, such amount if it is deemed manifestly excessive.
and guarantees? Portuguese courts have come to limit such amounts on a frequent
basis whenever they clearly exceed the effective damages incurred.
In private contracts, all forms of guarantee are admissible. The
most common form of guarantee is a first-demand bank guarantee.
Company guarantees are less common but are not forbidden. 3 Common Issues on Construction
In public contracts, the forms of guarantee are legally established
Contracts
and are, in accordance with article 90 of the Public Contracts Code,
either made by means of a cash deposit or titles issued, or guaranteed 3.1 Is the employer entitled to vary the works to be done
by the Portuguese State, bank guarantees, or an insurance guarantee. under the contract? Is there any limit on that right?
1.8 Is it possible and/or usual for contractors to have In a private construction contract, unless otherwise agreed by the
retention of title rights in relation to goods and parties, the employer may not vary the nature of the works, but
supplies used in the works? Is it permissible for only their value, and only up to a fifth of the agreed price. Within
contractors to claim that until they have been paid public construction contracts, the employer may request, if certain
conditions are met, variations to be performed under the contract.
Such variations should not, however, exceed 10% of the price of
the contract.
The contractor has the legal right to retain the works as long as
there are any amounts due, and the contractor also has the right

3.2 Can work be omitted from the contract? If it is 3.8 Who usually bears the risk of a change in law
omitted, can the employer do it himself or get a third affecting the completion of the works?
party to do it?
Usually such risk is borne by the employer, although it is common
In private and public construction contracts, works can be omitted to make exceptions for tax and environmental law in public
from the contract. Works omitted from the contract can then be construction contracts.
Portugal
executed by the employer or a third party on its behalf.

3.3 Are there terms which will/can be implied into a to the design and operation of the property?
Usually intellectual property is transferred to the employer at the
Yes, there are terms that may be implied into a construction end of the works.
contract regardless of its public or private nature. Both civil and
administrative laws provide an important set of rules which may 3.10 Is the contractor ever entitled to suspend works?
supplement a contractual agreement.
The parties may agree freely on suspension causes. Delayed
3.4 If the contractor is delayed by two events, one the payments or force majeure are common causes of suspension.
fault of the contractor and one the fault or risk of Civil law establishes that the contractor may suspend the works if
his employer, is the contractor entitled to: (a) an payments are delayed (“exceptio non adimpleti contractus”).
concurrent delay?
Concurrent delays would probably only entitle the contractor to there any grounds which automatically or usually
an extension of time. The costs occasioned by a concurrent delay those termination rights need to be set out expressly?
would not usually be considered the responsibility of the employer.
Grounds to terminate a contract can be freely agreed by the parties.
3.5 If the contractor has allowed in his programme a Under objective circumstances, the innocent party may terminate
period of time (known as the float) to allow for his own the contract by declaring to the guilty party that they have lost their
delays but the employer uses up that period by, for interest in the contract. If the execution of the works becomes
impossible, any of the parties is entitled to terminate the contract.
Yes, as long as the float was identified as such in the works schedule. in your jurisdiction? What remedy does this give
3.6 Is there a limit in time beyond which the parties to uneconomic is grounds for a claim for force majeure?
against each other? How long is that period and from Yes, Portuguese law accepts the concept of force majeure, limited
to extraordinary events mostly beyond human determination. Force
majeure situations, which in good faith cause the execution of the
In Portugal, all claims are subject to a limitation period. In the contract to be unbearable or impossible, allow the injured party to
case of defects in construction works, such limitation period is claim a change, reduction or relief of obligations or the termination
five years, except for claims referring to structural elements which of the contract. With regard to the second question, it is not likely
have a limitation period of 10 years, beginning from the date the that such a claim would be successfully argued, unless the contract
finished works were accepted. However, defects must be notified to had become uneconomic due to force majeure.
the contractor within one year from the moment that the employer
becomes aware of such defects, and the claim must be filed within
the following year. If these deadlines are not met, the employer may entitled to claim the benefit of any contract right
no longer bring claims against the contractor. which is made for their benefit? E.g. is the second or
building?
conditions?
The answer to both questions is affirmative as such rights are related

This risk is normally borne by the employer. However, it may be
to the building itself and thus will be transferred with the property
considered as a change of circumstances under which the parties
rights, within the guarantee period.
agreed to contract, as long as such event was abnormal and was
unpredictable and, in good faith, caused the execution of the
contract to be impossible. In such case, the risk will be shared either 3.14 Can one party (P1) to a construction contract which
by changing or reducing the terms of the contract or, if the contract owes money to the other (P2) set off against the sums
is impossible to execute, by resolving it.
The right of set-off in pecuniary undertakings is provided in the

Civil Code and operates by means of a simple statement to the other

party. Such right of payment must be judicially demandable. This 4.3 Do your construction contracts commonly have
right does not exist in public contracts if the public contractor is the arbitration clauses? If so, please explain how
Portuguese State.
Construction contracts of higher value commonly have arbitration

3.15 Do parties to construction contracts owe a duty of clauses. Arbitration is well consolidated in the Portuguese jurisdiction
Portugal
and is ruled by Law no. 63/2011, of 14 December. Arbitration usually
starts with a notice to all interested parties defining the object of
the dispute, presenting evidence and arguments, and nominating an
Parties to any contract subject to Portuguese law are obliged to act arbiter. The counterparties are given the opportunity to present their
in good faith towards one another. evidence and arguments and (dis)agree with the nominated arbiter,
or nominate their own arbiter, when the arbitration is to be held by a
3.16 Where the terms of a construction contract are group of three arbiters. In the latter case, the two nominated arbiters
ambiguous, are there rules which will settle how that shall nominate the third, who will preside. Awards are taken according
ambiguity is interpreted? to the Portuguese statutory rules, unless the parties should choose
that the arbiters shall decide according to equity. The arbiters may
Yes, the Portuguese Civil Code establishes such rules. In fact, also determine injunctions. Decisions are binding between parties,
unless otherwise agreed by the parties, the interpretation of the although those taken according to statutory rules may be appealed to
contractual terms shall be made by taking into consideration the the State courts if the parties previously agreed so. Decisions may be
hypothetical will of the parties if they had previously foreseen such revoked by the State courts if void.
ambiguity. Nevertheless, if the rules of good faith determine a
different solution, such solution shall prevail.
3.17 Are there any terms in a construction contract which and enforce international arbitration awards? Please
are unenforceable? advise of any obstacles to enforcement.
No, as long as such terms comply with the law and the obligations The Portuguese courts recognise and enforce international arbitration
are feasible. awards. Enforcement may only be denied within the limitations
provided in Law no. 63/2011, of 14 December, related generally to
irregularities of the arbitration procedure, violation of the Portuguese
3.18 Where the construction contract involves an element statutory rules, or the principles of international order.
limits on the extent of his liability? In particular, does 4.5 Where the contract provides for court proceedings
the designer have to give an absolute guarantee in in a foreign country, will the judgment of that foreign
respect of his work? court be upheld and enforced in your jurisdiction?
The liability of the designer may be contractually limited. Foreign courts’ judgments on construction contracts can be enforced
in Portugal after being revised by a higher Portuguese court. For
some countries, specific international conventions may be applicable
to ease such procedure.
4.1 How are disputes generally resolved? 4.6 Where a contract provides for court proceedings in
Disputes are generally resolved by judicial courts. In contracts with any rights of appeal and a general assessment of
higher values, however, the parties frequently choose arbitration as how long proceedings are likely to take to reduce: (a)
a faster mean of resolving their disputes.
4.2 Do you have adjudication processes in your Court proceedings related to construction contracts, both of civil
jurisdiction? If so, please describe the general and administrative law, will follow a common procedure which
procedures.
begins with a requirement to define the object of the dispute, then to
present evidences and arguments, and to conclude with the demand.
Adjudication processes similar to those provided in the UK’s The counterparty is given the opportunity to present its evidence
Construction and Regeneration Act have ceased to exist in public and arguments. If further evidence is necessary, an audience is
construction contracts, and have never existed in private construction adjourned and the final decision will follow. Generally, the right
contracts. of appeal is allowed only if the plea has a value superior to the “a
quo” court’s limit, and the party’s loss amounts to more than half as
much as such limit. It is not possible to determine how long each
proceeding is likely to take.

António André Martins Joana Maltez

FALM – Sociedade de Advogados, RL FALM – Sociedade de Advogados, RL
Rua Abranches Ferrão, n.º 10, 5.º B Rua Abranches Ferrão, n.º 10, 5.º B
1600-001 Lisbon 1600-001 Lisbon
Portugal Portugal
Tel: +351 21 722 4200 Tel: +351 21 722 4200

Portugal
Fax: +351 21 722 4201 Fax: +351 21 722 4201

Email: aamartins@falm.pt Email: jmaltez@falm.pt
URL: www.falm.pt URL: www.falm.pt
António is the Partner in charge of the law practice groups for Joana is a Senior Associate in the law practice groups for the
Construction, Public Procurement, and Project Finance. Within Construction, Public Procurement, Project Finance and Expropriation
these practice areas, he has successfully advised some of Portugal’s sectors. She has been involved in several public procurement bids
largest construction and engineering contracts. António has also been with construction and engineering contracts as a consultant for the
actively participating in the negotiation of numerous project finance bidders, and is on the teams that continuously advise the private
deals throughout the last 15 years, advising some of the largest contractors in managing such public contracts. Joana has advised
European construction companies. on infrastructure projects, railways, highways, hospitals, prisons and
other major buildings.
FALM – Ferreira de Almeida, Luciano Marcos e Associados, Sociedade de Advogados, SP, RL is a law firm with four Partners. Incorporated in 2006
and therefore celebrating its 12th anniversary this year, the firm thrives on its Partners’ and Associates’ experience of over 30 years within the different
areas of public and private law, mostly focused on planning and real estate law, construction, public procurement and project finance.
The firm has advised a large number of national and foreign construction and infrastructure companies in some of the major construction and
engineering projects in Portugal in recent years. The teams are very much used to working with clients from the very inception of a project – usually the
acquisition of the site – to the licensing and zoning procedures, construction and sale, through to the operation and maintenance of the finished asset.

Chapter 23
Romania Valentin Trofin
Trofin & Asociaţii SCA Oana Cuciureanu
such as technical and economic documentation development

services during certain phases of the project.
Also, in construction practice, general contracting agreements are
1.1 What are the standard types of construction contract frequently encountered (contract de antrepriza generala) between
in your jurisdiction? Do you have contracts which employers and general contractors, where the general contractor
subcontracts part of the works for which he does not have the
contract. Please also describe any forms of design- necessary experience or resources. Through this contract, the
only contract common in your jurisdiction. Do you contractor usually assumes responsibility for the supply of all
have any arrangement known as management the materials, labour, equipment and services necessary for the
contracting, with one main managing contractor construction of the project, obtaining the construction permits, if
and with the construction work done by a series needed, and coordinating the subcontractors and their work on the
of package contractors? (NB For ease of reference site so that the project is delivered within the planned completion
time and budget.
engineering contracts.) The contractor concludes contracts with its subcontractors, but in
most cases the employer’s prior approval is required or the employer
No standard forms of construction and design contract exist in the requires notification in advance of any subcontractor appointment.
Romanian legal system, except for large infrastructure projects,
where it is mandatory to use standard forms of contract, according 1.2 Are there either any legally essential qualities needed
to the latest legislative changes. to create a legally binding contract (e.g. in common
The Ministry of Regional Development, Public Administration law jurisdictions, offer, acceptance, consideration
and European Funds has drafted two standardised contract models and intention to create legal relations), or any
for works contracts (for, respectively, design and build) related
to publicly funded investment objectives, in accordance with the any need for the contract to be evidenced in writing)?
National Strategy for Public Procurement developed by the national
construction institutions together with the European Commission.
A construction contract is legally concluded if it respects the
The contracts were approved by Government Decision no. 1 of 10
general conditions for concluding a valid contract, these being: (a)
January 2018.
the parties have the ability to enter into a contract; (b) the parties
Except for these instances, the parties may choose to use their consent to the contract; (c) the contract has a determined and lawful
own standard contracts, but the standard forms most widely used object; and (d) the contract has a lawful and moral cause.
in Romania for national and international projects are published by
No written form is required as long as the consent of the parties to
the International Federation of Consulting Engineers (Fédération
enter into the construction contract is found and held.
Internationale des Ingénieurs-Conseils) (FIDIC).
Also, a contract may be concluded when a party accepts without
Still, it is customary for standard contracts to incorporate and
any amendment an offer to enter into a contract by the other party.
comply with Romanian law mandatory requirements and practices
Even if it is theoretically possible to conclude a contract “in a
on engineering, design and build. Usually, the contracts for
simplified form” (offer/acceptance), general practice is to conclude
engineering projects differ from design and construction contracts.
the contract in writing in order to be able to precisely determine the
The following contracts may be used: extent of the parties’ obligations.
■ The “Red FIDIC” – the “Conditions of Contracts for
The price must be determined or at least be determinable and, if not
Construction”. These are used for building and engineering
works designed by the employer. set out in the contract, is considered to be the price provided by the
law or calculated accordingly, or established in relation to the works
■ The “Yellow FIDIC” – “Conditions of Contract for Plant and
executed and the costs incurred.
Design-Build”. These are used for electrical and mechanical
plant, and for building and engineering works, designed by Moreover, the contract is considered to be a sale contract and not a
the contractor. construction contract when, according to the parties’ intention, the
A common design-only contract in Romania is the service contract, execution of the works is not the main purpose of the contract, also
through which the provider undertakes to provide design services taking into consideration the value of the assets supplied.

Trofin & Asociaţii SCA Romania
Adjudication is not formally recognised by Romanian legal The contractor is responsible for the construction works until
provisions and, consequently, is not enforceable. During the hand-over; therefore he usually undertakes by contract the
performance of works where a standard form of FIDIC contract obligation to conclude an all-risk insurance policy covering personal
is concluded, many disputes are referred to adjudication panels. and property damage. The risks insured include: flood, fire, and
The adjudicator’s decision will not be enforced by the Romanian earthquake; property damage to the works or to the equipment;
courts if the losing party is non-compliant. Recently, the damage caused to third parties; and employee injury caused on-site
Romanian High Court decided that Dispute Adjudication Board by the work or equipment.
Romania
(DAB) decisions cannot be enforced, even if they are ordered by It should be noted that, according to the Romanian Employment
way of a provisional or partial arbitration award. Code, the employer has the obligation to insure all employees for the
The effects and limitations of Romanian law on FIDIC contracts risk of accidents at work and occupational diseases (the employer is
have been confirmed as, during a procedure of enforcement of such different from that in construction contracts; in this case it refers to
an arbitral award, the Romanian courts rejected the claim of the the person that employs the workers, usually the contractor).
contractor on the ground that partial arbitral awards have no final
effect and therefore do not have the nature of an arbitral judgment, 1.5 Are there any statutory requirements in relation
as this is provisory and produces effects only until the settlement of to construction contracts in terms of: (a) general
the pending arbitration. requirements; (b) labour (i.e. the legal status of those
1.3 In your jurisdiction please identify whether there is employees); or (d) health and safety?
In principle, there are no statutory requirements in relation to
enter into a contract later or to commit itself to meet construction contracts.
certain costs to be incurred by the contractor whether According to the Civil Code, the employer is obliged to obtain all
or not a full contract is ever concluded. authorisations required by law in order to execute the works and the
constructor must cooperate by delivering to him all the information
The Romanian legislation does not include the concepts of letter of necessary in respect of its specialisation.
intent or letter of acceptance in construction contracts. However, Law 50/1991 (“Construction Act”) regarding the authorisation of
according to the principle of freedom of contract provided by the construction works requires the construction work to be approved by
Civil Code, the parties are free to conclude any contracts and to the competent authorities and a building permit. The construction
determine their content in the limits foreseen in the law, and works cannot be initiated in the absence of these. Currently, a bill
according to public order and the principles of morality. is open for public debate amending the existing Construction Act.
On this topic, the Civil Code provides for the unilateral promise, This draft law (on the authorisation of the execution of construction
which is legally binding only for its author, whose intention is to works and the demolition of constructions) was brought to the
undertake obligations regardless of its acceptance. If the author did attention of the public by the Ministry of Regional Development,
not stipulate a period of time for completion of its obligations, the Public Administration and European Funds. This project was put up
promise is considered to be made for the period appropriate for the for public debate on 15 January 2018 and is due to be approved by
nature of the obligations and for the circumstances. the Government, debated in Parliament and, subsequently, approved
Also, Romanian civil law provides for the possibility of the parties by the head of state. The main amendment to the Construction Act
to conclude a promise to contract, which shall contain all the clauses proposed by this project consists in the possibility of executing
of the envisaged contract, in the absence of which the parties could certain construction works without a construction permit or with a
not execute the promise. If not executed, the employer is entitled to permit obtained using simplified documentation.
damages or he may address the court in order to obtain a decision Moreover, an urbanistic certificate, also known as a Town Planning
that substitutes the contract. This can be interpreted as a legally Certificate, is required in order to acknowledge and respect the
binding indication of willingness. If the parties only undertake to legal, economic and technical requirements of the land and existing
negotiate in order to conclude or amend an agreement, it is not be buildings and determine the necessary approvals for authorisation.
considered a promise to contract and is therefore not legally binding. Also, the Construction Act provides that all constructions must fulfil
The party initiating, continuing or breaking negotiations contrary certain requirements, such as resistance and stability, fire safety,
to good faith shall be liable for the prejudice caused to the other hygiene, public health and environmental protection.
party. In determining such damage, the expenses incurred in the In regard to employment relationships, the Romanian Employment
negotiation, the refusal of other offers by the other party and any Code provides that individual employment contracts must be
similar circumstances will be taken into account. concluded with all employees. The contracts must contain the
job description and working conditions and must be registered
to the local labour authorities. Also, the employees must have
which it would be commonplace or compulsory to the educational background or professional experience set by the
have in place when carrying out construction work? internal regulations in order to occupy certain positions.
For example, is there employer’s liability insurance The subcontractor’s legal status relationships are set by the
for contractors in respect of death and personal subcontracting agreement. The main contractor is liable for the
subcontractor’s acts as well as his own. It is important to note that,
if they were not paid by the contractor, the persons who carried out
activity for the performance of the services or the execution of the
There is no compulsory construction-related insurance under contract on the basis of a contract concluded with the contractor
Romanian law, but in practice the parties usually agree certain non- have the ability to make a direct claim against the employer up to
compulsory insurances. the amount owed by the employer to the contractor at the time of
submitting the claim.

According to the latest changes in Romanian fiscal regulations, in date in a private contract. However, in public contracts, the law
force from 1 January 2018, some of the social contributions are now provides that the guarantee shall be constituted by bank transfer or
borne by the employee (such as pension and health contributions). by a guarantee instrument issued under the law by a bank or an
Still, the work insurance contribution of 2.25% of the wage and insurance company.
part of the pension contribution (4% of the wage in case of unusual Regarding value, usually the performance bond is set at an amount of
conditions of work, or 8% of the wage in case of special conditions up to 10% of the contract value (in public contracts, this percentage
of work) are borne by the contractor. In any case, where a labour is mandatory).
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agreement is mandatory, the employee’s organisation (usually the
contractor) has a duty to calculate and withhold all the taxes for
which his employees are accountable and then pay the tax to the tax 1.8 Is it possible and/or usual for contractors to have
authorities on the employees’ behalf.
As for health and safety, according to Law 319/2006 regarding health contractors to claim that until they have been paid
and safety at work, the employer (as described in question 1.4) has they retain title and the right to remove goods and
the obligation to take the necessary measures in order to ensure: the materials supplied from the site?
safety and health of workers; the prevention of professional risks;
the provision of information to, and training of, workers; and the The Civil Code states that, in contracting contracts, the contractor
maintenance of the organisational framework. Also, according to executes the works at its own risk. It also states that, in construction
Government Decision no. 300/2006 regarding minimum health contracts, the risks of the contract pass to the employer from the date
and safety standards for temporary or mobile sites, the employer of the hand-over of the construction, upon completion of the work.
or the project manager must ensure that a safety and health plan is This means that, until a Taking Over Certificate is obtained, the
established prior to the opening of the site. ownership of the works belongs to the contractor, but in most
contracts the contractor waives this right in favour of the employer.
1.6 Is the employer legally permitted to retain part of The Romanian Civil Code also institutes a legal mortgage on
the purchase price for the works as a retention to be the construction for the contractor in order to guarantee that
released either in whole or in part when: (a) the works the employer pays the price due for the works; the mortgage is
constituted and preserved under the law. Therefore, the amounts
owed to the architect and the contractor’s employees for performing
the construction works are also guaranteed by a legal mortgage over
There is no express provision on this issue in domestic legislation;
the construction if they have a direct contract with the beneficiary
therefore the employer is legally permitted to retain part of the
and only to the extent of the added value of the works.
purchase price if provided by the contract.
Usually, construction contracts provide for a monthly progress
payment depending on the amount of work the contractor has 2 Supervising Construction Contracts
completed and it is not necessary for the employer to give a “pay
less” notice to the contractor, in case the employer is not going to pay
certain amounts stated in the contractor’s progress payment report. supervised on behalf of the employer by a third
Based on the general freedom of contract, it is common for the party? Does any such third party (e.g. an engineer
parties to agree that the employer withholds part of the purchase or architect) have a duty to act impartially between
price as retention for performance or defects liability. Usually, contractor and employer? Is that duty absolute or is
this retention is replaced by bank guarantee letters (as described in
question 1.7). impartially.
1.7 Is it permissible/common for there to be performance Yes, it is a common practice in Romania that consultant engineers or
bonds (provided by banks and others) to guarantee architects are employed by the employer in order to supervise and
performance, and/or company guarantees provided to manage all contractual issues between the employer and contractor.
Are there any restrictions on the nature of such bonds Unfortunately, industry practice drastically changed the scope of
and guarantees? engineers as it is known in the FIDIC Suite of Contracts. Tellingly,
the engineer’s scope is limited to that of a courier, an expensive one,
Construction contracts commonly require that the contractors whose main duty is only to dispatch the correspondence between the
provide performance bonds in order to guarantee performance employer and contractor, having no power to determine any issues
of the works. The contractor uses a guarantee letter which is without the prior approval of the employer.
most commonly issued by a bank, but can also be issued by a The employer’s desire for absolute control over the engineer’s
company. However, a guarantee letter issued by a subsidiary or actions and determinations can result in endless disputes and delays
a holding company of the contractor or by an insurance company which are eventually referred to the courts for a final decision.
is usually more difficult to enforce and it may involve contentious
proceedings. According to the Romanian Civil Code, guarantee
letters are irrevocable and unconditional, and must be paid at the they will pay the contractor when they, the employer,
first and simple demand of the employer, unless otherwise provided have themselves been paid; i.e. can the employer
in the text of the letter of guarantee. Therefore, the bank that issued include in the contract what is known as a “pay when
the guarantee cannot invoke exceptions based on a pre-existing paid” clause?
There are no limitations on the nature of the bonds or guarantees The inclusion of a provision in a construction contract, according
used in order to guarantee the risk of not respecting the completion to which payment of the contractor takes place upon payment of

the employer, is not prohibited by Romanian law. The general

provisions in this matter state that the employer is bound to pay
the contractor the price at the time and place of the reception of the Contracts
entire construction, unless otherwise stated by law or by contract.
In practice, the parties provide such clause especially when 3.1 Is the employer entitled to vary the works to be done
subcontracting the works. However, the law allows persons who, under the contract? Is there any limit on that right?
on the basis of a contract concluded with them, have carried out
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an activity for the provision of services or the performance of the The Civil Code has no provisions for variation of works. Thus, the
contracted work, to claim directly against the employer for up to the parties are free to agree on the procedure for variations. Where the
amount which the latter owes to the contractor when submitting the contracting agreement has no provisions for variations, the rules on
claim. Moreover, in order to guarantee the payment of the price due concluding contracts will apply. In this case, the employer will send
for the work, the contractor has a legal mortgage on the construction, full details of the variation, followed by an offer from the contractor
which is established and preserved under the law. in terms of the extended time needed for completion and the price.
Also, if the contractor does not receive payment according to the Where the employer accepts the contractor’s offer, an addendum
clauses in the contract, he is entitled to receive financing charges to the main construction contract will be signed, or the parties may
compounded monthly, calculated on the amount unpaid during the choose to execute a totally new contract.
period of delay.
2.3 Are the parties permitted to agree in advance a fixed omitted, can the employer do it himself or get a third
sum (known as liquidated damages) which will be party to do it?
particular breaches, e.g. liquidated damages for late Where the contractor fails to carry out any obligation under the
completion? If such arrangements are permitted, are contract, the employer: (a) may require the contractor to make good
the failure and to perform it within a specified reasonable time; (b)
estimate of loss, or can the contractor be bound to may employ a third party to perform it, deducting the corresponding
pay a sum which is wholly unrelated to the amount of amounts from the contract amount; or (c) may choose to terminate
financial loss suffered? the construction agreement should the omitted works be substantial
enough.
Yes, liquidated damages are enforceable under Romanian law Due to the fact that there are no statutory provisions in this respect,
subject to the scrutiny of the court if a dispute is referred to it for it is advisable for the parties to agree on all these matters in the
determination. construction contract.
In practice, when the parties stipulate in the contract a pre-estimated
loss, the employer’s damage must be proved in order to collect 3.3 Are there terms which will/can be implied into a
the compensation and, according to the Civil Code, the courts construction contract?
can decrease the amount in case they consider it to be excessive,
respectively: i) when the main obligation was partially executed Yes, there are several construction provisions which are considered
and such execution benefitted the employer; and ii) the penalty as implied terms, especially those referring to the formal
(applied to the contractor) is manifestly excessive in relation to the commissioning of the works, construction quality regulations and
damage that could have been foreseen by the parties when signing other regulations related to fire safety, general health and safety or
the contract. In the latter case, such decreased compensation must environmental protection.
remain higher than the main obligation. Any stipulation contrary to
the above shall be deemed not to be written.
Also, a further two situations can determine a decrease in the
compensation: when the contractor has a guilt in causing the his employer, is the contractor entitled to: (a) an
damage; or the damage was caused in part by an event whose risk extension of time; or (b) the costs occasioned by that
was assumed by the contractor. In both cases, the compensation will concurrent delay?
be properly decreased.
The employer can either demand the execution of the main The Romanian Civil Code entitles the employer to terminate the
obligation, or the payment of the compensation, except when a construction contract if the contractor fails to perform its works in
penalty was stipulated for late compliance with the main obligation accordance with the initial time schedule or if he does not perform the
(in this case, the employer can request both the execution of the necessary remedies (Article 1872). Also, the contractor is entitled
main obligation and the payment of compensation – if he does not to terminate the contract if the employer does not accomplish its
waive this right or if he does not accept, unconditionally, the main own contractual obligations and the performance of the agreement
obligation). becomes impossible due to the employer’s fault. The contractor
If the parties do not stipulate a pre-estimated loss and they provide may also claim penalties (Article 1873).
only liquidated damages for late completion, then the employer will The contractor has the possibility to suspend the works in case
have the right to collect compensation, without the need to prove the some design errors are ascertained and the employer is accordingly
damage he suffered. The value of the liquidated damages will be notified. The non-fulfilment of contractual obligations is provided
calculated at the legal interest provided by Order 13/2011 regarding for by the Romanian Civil Code and gives one party the right to
the legal interest and the regulation of financial-fiscal measures in suspend its own obligations towards the other party if the latter fails
the banking field. to fulfil its obligations.

In case two hindrances occur, one being the contractor’s fault and ■ The first scenario is in case the design is performed by
the other the employer’s, and the contractor claims a time extension, the employer, where it is mandatory for him to order and
the claim must be analysed separately from the event caused by complete a geological survey of the land before starting any
the employer and its potential claims. Both parties may request design works. Therefore, it is the employer’s risk when issues
costs occasioned by their delays. The competent state or arbitral related to unforeseen ground conditions are raised. In this
case, the contractor is entitled to a costs and time extension.
courts shall decide on such claims and shall compensate outstanding
receivables. However, both hindrances should be very well ■ The second scenario is where a design-build contract is
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determined in order to proceed with compensation, but in practice executed between the parties. In this case, if the contractor
undertakes any geological survey of the land, it may bear the
such strict determination may not be possible.
risk of unforeseen ground conditions.
It is worth mentioning that, in the Romanian state court system,
expert witnesses are licensed by the Romanian Ministry of Justice
and, regretfully, there are no experts qualified to perform critical 3.8 Who usually bears the risk of a change in law
path analyses where concurrent delays arise.
As a general rule, the contractor bears the risk of non-performance of

3.5 If the contractor has allowed in his programme a the contract, and is therefore responsible for performing the works in
accordance with any legislative changes. For example, in the case of
example, a variation, is the contractor subsequently a specific design-build contract, a change in legislation affected the
entitled to an extension of time if he is then delayed conditions for issuing construction permits for the second building
after this float is used up? listed in the contract, for which it was estimated by the contractor
that it needed an extension of time of nine months. The employer
Romanian law does not provide a clear definition for floats; therefore rejected the contractor’s application for an extension of time. The
the general rules for contracts shall be applied. The work schedule dispute was referred to the state courts for determination, which
is drafted by the contractor; therefore any additional period of time found and held that the contractor was experienced, and, at the
stipulated therein shall be interpreted in favour of the contractor. time it entered into the construction contract, it should reasonably
Moreover, the civil law provides that if a contract remains unclear have foreseen such a change in the law. Due to this, his claim was
after applying the general rules of interpretation, it shall be dismissed and the employer’s counterclaim for liquidated damages
interpreted in the favour of the party that undertakes the obligation. for late completion was granted.
Hence, the contractor is entitled to an extension of time if the However, each party bears the risk of a change in law if the change
employer uses by a variation any additional period of time allocated regards one of their respective obligations. For example, the
by the contractor for the performance of the works. employer bears the risk of amendments to the law on obtaining
building permits if it is his duty to design and obtain the same.
Hardship might be used as successful defence when changes in
a construction contract may no longer bring claims legislation occur, provided that some conditions provided by law
against each other? How long is that period and from are fulfilled.
According to the Civil Code, the period for guarantee against to the design and operation of the property?
construction defects are provided by a special law, which states
that the contractor shall be liable, according to his obligations, for Usually, the employer owns the intellectual property rights to the
hidden construction defects arising in a period of 10 years from the technical design, drawings, specifications and other documents
reception of the work. The contractor is also liable for the entire prepared by him or on his behalf. The contractor owns intellectual
duration of the construction’s existence for defects in structural
property rights and author rights for the design and special technical
works resulting from non-observance of the design and execution
solutions developed by him. However, it is commonly agreed that
regulations in force at the date of the construction.
the parties use each other’s documents for the purpose of fulfilling
Thus, the contractor is liable for the hidden defects that manifest in their contractual obligations.
this 10-year period (except for defects in structural works that can
manifest for the entire duration of the construction’s existence). The
employer is entitled to submit the claim in court on this aspect in the 3.10 Is the contractor ever entitled to suspend works?
general term of three years from the discovery of the defect.
For the cost of works not paid by the employer, the contractor will The Romanian Civil Code provides that the contractor may suspend
also have to submit its claim within three years from the due date; works if the employer does not immediately communicate any
otherwise his claim will be dismissed as being time-barred. measures taken in order to remove the errors or the shortcomings
of the design works or if the measures taken are not appropriate,
provided that the contractor has previously notified the employer
3.7 Who normally bears the risk of unforeseen ground and the designer of these issues.
conditions?
As mentioned below in question 3.16, if a contract remains
Romanian law does not have any specific provisions for such cases. unclear after applying the general rules of interpretation, it shall be
Therefore, it is advisable for risk allocation between the parties to be interpreted in favour of the party that undertakes the obligation.
as clearly stated as possible in the contract. Moreover, according to another interpretation rule regarding unusual
In cases where no such provisions are addressed in the contract, the clauses and having in mind that the contractor’s right to suspend
issue might be determined by testing who has a better control of the works is provided by law, any contractual clause providing that
risk, the parties’ experience or by applying the general principles of the contractor waives its right to suspend the works is not effective
law. Nevertheless, we distinguish two main scenarios: unless expressly accepted by the contractor.

Also, in pre-formulated standard contracts (in which the essential If the impossibility of execution is temporary, the execution of the
clauses are imposed by one party and the other party only has the work is suspended for a reasonable period, taking into account the
possibility of accepting them as such), the clauses are interpreted duration and consequences of the event that caused the impossibility.
against the party that proposed it. In this situation, the contractor may suspend the performance of his
Also, according to a principle of the Romanian law, one party has obligations or terminate the contract. In the last case, the contractor
the right to refuse to execute its obligation, to the extent appropriate, can claim for the reimbursement of the benefits already performed
when the other party does not perform its obligations arising out of in relation to the obligations that can no longer be executed due to
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a reciprocal contract. In light of this, the contractor may suspend the event.
works when the employer is in default. If the impossibility of execution is total and final, the contract ceases
automatically and without notice from the moment the event occurs.
In this case, if the event of force majeure or frustration is proven, the
there any grounds which automatically or usually employer is not liable for damages. Also, the contractor could claim
entitle the innocent party to terminate the contract? for reimbursement of the benefits already performed.
Do those termination rights need to be set out With regard to the possibility of successfully arguing that a contract
expressly? which has become uneconomic is grounds for a claim for force
majeure, the Romanian Civil Code regulates the legal principle
A contract may be terminated by a resolution ordered by the court of hardship, which is an exception to the principle of pacta sunt
at the request of a contracting party or may be unilaterally declared servanda (contracts must be fulfilled).
by the entitled party.
According to the hardship principle, if the execution of the contract
At the same time, in specific cases where the parties have agreed in becomes excessively onerous due to an exceptional change in the
the contract, the resolution can operate automatically. In this case, circumstances, which would make it manifestly unfair to perform
the parties expressly state the grounds for automatic termination of the obligations, both parties may request:
the contract. (a) adaptation of the contract, in order to distribute fairly between
Romanian law contains specific provisions regarding termination the parties the losses and benefits resulting from the change in
of construction contracts. The Romanian Civil Code distinguishes circumstances; or
between the cases of resolution from the employer’s fault and from (b) the termination of the contract.
the contractor’s fault. It is important to note that a change of circumstances as well as the
The employer has the right to terminate the contract in cases where, extent of the circumstances must not and could not reasonably have
without justification: been taken into account by the entitled party when the contract was
(a) compliance with the agreed deadline for the reception of the concluded.
work has become manifestly impossible;
(b) the work is not executed in the agreed manner and within 3.13 Are parties which are not parties to the contract
the term determined by the employer according to the entitled to claim the benefit of any contract right
circumstances, and the contractor does not remedy the which is made for their benefit? E.g. is the second or
established deficiencies and does not change the method of subsequent owner of a building able to claim against
execution of the work for the future; and the original contracts in relation to defects in the
(c) no other obligations are fulfilled by the contractor according building?
to the law or under the contract.
The contractor has the right to terminate the contract and to claim Romanian law contains provisions under which a third party can
for damages if the contractor cannot start or continue to execute the claim the benefits of contract rights as long as they are made for
contract due to the employer’s own unjustified failure to fulfil its their benefit.
obligations. These rights can be agreed in the initial construction contract
(being in favour of a third person or containing stipulations for a
3.12 Is the concept of force majeure or frustration known third party) in which a party, called the promissor, undertakes the
in your jurisdiction? What remedy does this give other party, called the stipulant, to execute a benefit in favour of
the injured party? Is it usual/possible to argue another person, called the third-party beneficiary. By the effect of
successfully that a contract which has become the stipulation, the third-party beneficiary acquires the right to ask
uneconomic is grounds for a claim for force majeure? the promissor directly for the performance of the contract.
These rights can also be included in a side contract between a
The concept of force majeure and frustration are known under contracting party and the third-party beneficiary (the assignment of
Romanian law and constitute grounds for termination of a contract. a claim).
According to the Romanian Civil Code, force majeure is an external, Especially with regard to the construction contract, the employer
unpredictable, absolutely unavoidable and inevitable event. Also, may entrust to one or more subcontractors the execution of parts of
frustration is an event that cannot be predicted or prevented by the work. In relation to the contractor, the employer is responsible
the person who would have been responsible if the event had not for the work of the subcontractor as for his own work.
occurred. According to jurisprudence, force majeure events are,
Regarding liability for building defects, third parties (which acquire
in most cases, natural phenomena such as earthquakes, floods,
the building), are not entitled to claim any defects to the contractor,
landslides, etc. Wars and revolutions may also be considered as force
after the issuance of the taking over minute, unless it is proven that
majeure.
the contractor acted in bad faith and hid the flaws or the third-party
With regard to contracts concerning construction work, if the buyer could not identify any defects on a regular inspection of the
employer is hindered in its execution of the construction due to force site.
majeure or frustration, the contractor will be notified regarding the
existence of the event causing the impossibility of execution.

Subsequent owners are unable to assert any defect warranty claims

against the employer, taking into consideration that there is no 3.16 Where the terms of a construction contract are
contractual relationship. However, the buyer retains his rights to ambiguous, are there rules which will settle how that
assert warranty claims due to defects against the seller, who can
in turn direct action to the employer due to defective performance.
Usually, if the provisions of a construction contract are ambiguous,
general rules of legal interpretation shall be applied. Thus, in
Romania
accordance with Article 1268 of the Romanian Civil Code, if a
due to P2 the sums P2 owes to P1? Are there any provision in a contract may have several meanings, the provisions
limits on the rights of set-off? shall be interpreted according to the scope and object of the parties’
consent. This type of clause will also be interpreted taking into
If P1 owes to P2 a certain, liquidated and due amount to P2 and vice account the nature of the contract, the circumstances in which it was
versa, the Romanian legislation recognises and allows the mutual concluded, the prior meaning given by the parties, and the general
set-off of these amounts. This legal institution is provided by the meaning of such provisions, particular terms and customs. The
Romanian Civil Code. However, this type of compensation only provisions of a contract will only be interpreted in order to produce
operates whenever the parties agree upon the mutual debts. legal effects. As mentioned above in question 3.5, if a contract
remains unclear after applying the general rules of interpretation,
Also, the parties may insert in the construction contract the set-off of
mutual claims. This operates based on the parties’ mutual agreement. it will be interpreted in favour of the party that undertakes the
This kind of set-off will be applied in case the legal set-off is not obligation.
applicable, but the parties hold an interest to extinguish mutual In Romanian law, the contra proferentem interpretation of contracts
undertakings. For example, in a construction contract, the parties is applicable only for the pre-formulated standard contract, meaning
may agree on set-off if the contractor does not perform the repair contracts in which the essential clauses are imposed by one party
works in the defect liability period, in which case the employer will and the other party only has the possibility of accepting them as
deduct all their performance from the performance bond constituted such. Hence, in this case, clauses are interpreted against the party
by the contractor (as the employer itself or using a third party to that proposed them.
conduct the remedies). In this case, a certain notification procedure For example, if in the construction contract the parties provided a
will be used in order to consolidate the set-off. lump sum price and also an estimated quantity price, this clause
Another type of set-off is recognised by Romanian law: judicial (which may benefit one party and prejudice the other) will be
set-off of claims. In this regard, the High Court of Justice, in its interpreted in accordance with the parties’ will, such as prior
Judgment 2752 dated 26 September 2014, held that, in a civil negotiations, a prior offer communicated by the contractor which
claim which has already been initiated, the procedural instrument was accepted by the employer, or even the value of the contract.
the defendant has in order to fulfil its right is the counterclaim.
In case the parties use a FIDIC contract, the general conditions
Accordingly, the defendant can, against the claimant, set-off its own
provided therefor provide certain means of interpretation of the
debt if this debt is disputable and the other party does not recognise
contractual provisions or terms. From these provisions, the parties
it. The courts will rule on this matter and will set the mutual
receivables for the parties. may derogate particular conditions by introducing or eliminating
certain ways of interpretation.

care to each other either in contract or under any 3.17 Are there any terms in a construction contract which
other legal doctrine? are unenforceable?
In accordance with Article 1858 of the Romanian Civil Code, the In a construction contract, clauses which are abusive or void or in
employer must be immediately informed by the contractor if the breach of mandatory domestic legislation may not be enforced. For
usual performance of works, the construction’s durability and example, Law no. 72/2013 – related to the measures for a delay
its usage according to the design plan may be endangered by the in payment obligations resulting from agreements concluded
following: between professionals and/or between professionals and authorities
■ the obtained materials and other means for construction that – provides that, between professionals, the payment date must not
the employer has provided according to the contract; exceed 60 days after completion of works. By exception, the parties
■ inadequate instructions given by the employer; and may agree on the timing of the main payment, but this provision
■ the existence of unforeseen events that the contractor is not must not be abusive. A provision will be considered abusive if the
liable for. contractual provisions set delay penalties or a very high level of
Also, Article 1875 provides that the employer has to allow the interest for a delay.
contractor, if necessary, to use access roads, its own water supply However, the effectiveness of the provisions may be analysed by
equipment and other utilities which serve the site. Also, the competent courts, which will rule on each party’s assertions and
employer has the duty to obtain all the required legal permits for the evidence.
works’ performance. In order to fulfil this obligation, the contractor Standard clauses providing for the benefit of the person who
has the duty to cooperate with the employer, providing all the proposes: limitation of liability; the right to unilaterally terminate
necessary information that he has or he should have.
the contract; suspension of the performance of the obligations or to
Thus, in a Romanian construction contract, the parties have mutual prejudice the other party in the disqualification or the extension of
duties to protect rights and goods, and preserve the rights of the other the term; limitation of the right to oppose exceptions; restriction of
party. The aforementioned legal obligations are applicable whether the freedom to contract with others; tacit renewal of the contract;
or not these are provided in the contract, as these obligations are applicable law; arbitration clauses; or derogation from the rules on
provided by general law. jurisdiction of the courts will only have effect if expressly agreed to
If the parties choose to use a FIDIC agreement, this type of contract in writing by the other party.
usually provides mutual duties of care.

including an agreed list of potential members in the contract. The

3.18 Where the construction contract involves an element DAB cannot act as an arbitrator and its decision may be considered
of design and/or the contract is one for design only, technical evidence.
limits on the extent of his liability? In particular, does After receiving all the documents related to the dispute from the
the designer have to give an absolute guarantee in parties, the DAB will give a solution and its reasons for such. Such
respect of his work? decision, in accordance with FIDIC Rules, will be binding on the
parties, provided of course that the decision is accepted. Thus,
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The designer will be held liable for the works he has performed should a party be dissatisfied with the DAB’s decision, it should
and has contractually agreed to. Regarding any hidden flaws in communicate a prior notice communicated to the other party within
the construction, the designer and the other involved parties (such 28 days of the the DAB’s decision.
as the contractor, material supplier, technical expert, engineer) are Unless settled amicably, any dispute in respect of which the DAB’s
responsible for a 10-year period beginning at the time of taking decision has not become final and binding may finally be settled by
over the construction, or, in relation to structural integrity, for the international arbitration.
duration of the construction’s existence. The parties may derogate from the FIDIC General Conditions and
Should the designer prove the flaws are not a consequence of the may insert their own particular condition in order to organise and
design he provided and should he demonstrate that these flaws are give their own effect to the adjudication process.
a result of lack of coordination or supervision of the construction Please also see question 1.2 above.
works, his liability will be eliminated.
Also, the architect’s liability will be eliminated if he proves that the
employer wrongly chose materials, subcontractors or construction arbitration clauses? If so, please explain how
methods. The exemption of the architect’s liability shall not be arbitration works in your jurisdiction.
applied if this party acknowledged the soil, material flaws, election
of the subcontractors, experts or erection methods and did not notify Under Romanian legislation, the parties to a construction contract
the employer immediately during the performance of the works. may choose an arbitration clause. Some basic rules of arbitration
According to the quality of the construction, the architect is are also provided by the Romanian Procedural Code. In accordance
responsible and liable, based on the plans and work execution with Article 542 paragraph (1), the parties may agree to solve their
details he provided. disputes by arbitration. In the arbitration agreement, the dispute
may be referred to one or several persons, engaged by the parties or
arbitration agreement to rule on the dispute and render a final and
4 Dispute Resolution binding judgment. The arbitration may be ad hoc or institutionalised.
Having in mind the complexity of construction disputes in Romanian
4.1 How are disputes generally resolved? legislation, the parties usually choose the arbitration to be put
before ICC Paris or the International Commercial Arbitration Court
In case of a construction dispute, the parties or their legal organised by the Romanian Chamber of Commerce and Industry.
representatives (counsel) should try to solve it outside the national/ However, if a FIDIC contract is concluded and the parties choose not
arbitration court. In such case, a settlement or a protocol stressing a to amend the arbitration provision provided by its General Conditions,
mutual obligation to fulfil may be executed. in accordance with clause 20.6, the dispute shall be settled under the
Rules of Arbitration of the International Chamber of Commerce.
Nevertheless, if the amicable settlement of such disputes fails, the
parties may bring their claims before the national/arbitration courts Regarding the International Commercial Arbitration Court organised
(usually the Romanian Arbitration Court related to the Chamber of by the Romanian Commerce and Industry Chamber, on 1 January
Commerce or ICC Paris). 2018, new arbitration rules entered into force. These rules intend to
improve the activity of international commercial arbitration, taking
into consideration the latest European practices in commercial
4.2 Do you have adjudication processes in your arbitration. For example, a simplified procedure that should last at
jurisdiction? If so, please describe the general most three months is provided for claims under the value of 50,000
procedures.
lei, or a bifurcation procedure is possible.
The arbitral tribunal must be constituted of a single arbitrator or
Adjudication procedures are used only if the parties concluded a
several arbitrators in an odd number. If the parties did not agree on
FIDIC contract, in order to accelerate the solving of technical
the number of arbitrators, the claim will be ruled by three arbitrators,
issues arising from such contracts. The FIDIC clause related to
one being appointed by each party and the third being appointed by
the appointment of the Dispute Adjudication Board intends to
the first two.
encourage the parties to reach an agreement and allows them to refer
contentious matters to an impartial Dispute Adjudication Board. The arbitration award is final, binding and enforceable and has the
The adjudication process is a prior and mandatory proceeding and, legal effects of a court ruling. However, the parties may request the
unless the parties settle their claims, they will go to arbitration competent court (which is the Court of Appeal from the arbitration
proceedings. place) to annul this ruling if certain legal matters are attained (e.g.
the tribunal had no jurisdiction to rule, the arbitration tribunal was
Sub-clause 20.2 of the FIDIC Red Book provides two alternative
not legally constituted, one party was not legally summoned, or the
arrangements for the DAB: the first is with one sole member of the
arbitration was not thoroughly conducted).
DAB, having entered into a tripartite agreement with both parties;
and the second is with a DAB of three persons, each of whom has As a final note, construction arbitration is a more efficient manner
entered into a tripartite agreement with both parties. of solving construction disputes regarding time and expertise.
Romanian courts, which are highly loaded with all kind of
The appointment of a DAB may be facilitated, especially if the
commercial cases, have no specialised construction divisions, and
members are not appointed at the commencement of the contract, by
in most cases such disputes are not ruled in a fair and efficient way.

jurisdiction to hold the proceedings, without, however, being based

4.4 Where the contract provides for international exclusively on the defendant’s presence or property not directly
arbitration, do your jurisdiction’s courts recognise related to the dispute in the state in which that court is situated; and
(c) there is reciprocity regarding the effects of foreign judgments
between Romania and the state of the court that ruled the judgment.
According to the Romanian Civil Procedure Code, Article 1125, a Also, if the judgment has been given in the absence of the party who
lost the case, it must also prove that the party concerned has been
Romania
foreign arbitral award will be enforced in Romania if the dispute
is not contrary to the public policy and international law. The served in good time both with the summons for the trial/hearing and
procedure is provided by Articles 1124–1134 of the Romanian with the referral of the court, and that it was given the opportunity
Procedural Code. to plead its case and to appeal the decision. Unless certain prior
conditions are met, the court will not rule on the merits of the
Additionally, Article 1065 of the Romanian Civil Procedure Code foreign ruling and will not amend it.
stipulates the possibility to choose the most favourable law (“mitior
lex”): the New York Convention; or the Romanian Civil Procedural
Code. 4.6 Where a contract provides for court proceedings in
The grounds for dismissing the recognition or enforcement of any rights of appeal and a general assessment of
awards are identical in both cases because the Romanian Civil how long proceedings are likely to take to reduce: (a)
Procedure Code takes on the provisions of article 5 of the New York a decision by the court of first jurisdiction; and (b) a
Convention. decision by the final court of appeal.
According to the Civil Procedure Code, in order to enforce foreign
arbitral awards, an application for approval of the enforcement In order to initiate a claim in court, a party must submit an initial
shall be submitted to the tribunal, attaching the said award, and petition, which will stress its claim, legal and factual grounds, and
the arbitral convention translated into Romanian (article 4.2 of cite evidence that it intends to submit or has already obtained. If
the Convention on the Recognition and Enforcement of Foreign the claim has a value under 200,000 lei, the submission must be
Arbitral Awards, New York 1958). There is no requirement for addressed to the Lower Court. If the claim exceeds this value, the
a prior exequatur decision in order to address an application for claim must be submitted to a tribunal.
declaration of enforceability. The defendant has the possibility to answer the claimant’s statement
In general, the Romanian courts will only verify some prior of claim by submitting a statement of defence, and providing all its
procedural issues and will not debate the merits of the arbitral award. legal and factual grounds and counter evidence. If the defendant
also has claims against the claimant, a counterclaim submission will
be drafted and submitted together with the statement of defence.
Since technical issues are frequently cited in such cases, in most
court be upheld and enforced in your jurisdiction? construction cases a technical report is submitted as evidence. The
report may illustrate if the parties performed the construction works
in accordance with their agreement, if there were flaws, deficient
Firstly, we should distinguish whether the ruling is rendered by an
works, or the performed works need remedies. This evidence is
EU Member State or by a third state.
the most important of all, as all courts need technical opinions,
In the first case, as construction cases are commercial cases, the considering the fact that specialised construction court divisions are
parties being companies (professionals), Regulation 1215/2012 of not organised in Romania.
the EU shall apply. Thus, a judgment served by a Member State
The first court ruling may be appealed within 30 days from its
Court will easily be upheld and enforced in Romania via a simplified
communication. In the second procedural stage, the parties may
procedure based on European law.
debate all the matters of the case, thus all kinds of evidence must be
Article 36 of Regulation 1215/2012 provides that all rulings held by submitted if requested, even the technical report). The appeal ruling
courts in an EU Member State shall be recognised by the other states is enforceable.
without any special procedure. Article 39 of the same regulation
The Civil Procedure Code and general legislation stresses that
provides that a judgment rendered by an EU Member State, which
all financial claims cases may be challenged in a second appeal
is enforceable in the State, that served it, is enforceable in any other
(including construction cases) if their value exceeds 500,000 lei.
Member State without requiring a writ of compulsory execution.
Further, the Romanian Government, by Ordinance no. 95/2016,
In the case of rulings rendered by third states, in accordance with decided to set up a new value threshold of 1,000,000 lei for cases
the Romanian Civil Procedural Code, foreign judgments are fully that may be challenged in a second appeal. However, this threshold
recognised in Romania (i) if they refer to the personal status of the applied only to cases registered between 1 January 2017 and 1
citizens of the state in which the ruling was made, (ii) if they were January 2018.
ruled in a third state recognised as being the same as the citizenship In accordance with Constitutional Court Decision no. 369, dated 31
of each party, or (iii) if recognition has been rendered on the basis July 2017, any threshold for second appeals was eliminated, and
of the law determined as applicable to Romanian law, and it is not currently all appeal rulings may be challenged in a second appeal.
contrary to the public order of Romania, and the right to a defence
Usually, a construction case may take between one-and-a-half and
has been fulfilled.
two-and-a-half years to be finally settled. The parties may enforce
Rulings other than those mentioned above may be recognised the judgment after the appeal court settles the case, but when such
in Romania in order to benefit from res judicata if the following a case is initiated, the time and cost must be taken into account,
conditions are met cumulatively: (a) the judgment is final according as the parties require the necessary resources to proceed with such
to the law of the state where it was rendered; (b) the court which difficult cases.
ruled on it had, under the law of the parties’ state of residence,

Valentin Trofin Oana Cuciureanu

Trofin & Asociaţii SCA Trofin & Asociaţii SCA
70 Blvd. Ferdinand I, 3rd Floor 70 Blvd. Ferdinand I, 3rd Floor
2nd District 2nd District
021393 Bucharest 021393 Bucharest
Romania Romania
Romania
Tel: +40 21 337 50 00 Tel: +40 21 337 50 00

Email: valentin@trofin.com Email: oana.gheorghe@trofin.com
URL: www.trofin.com URL: www.trofin.com
Managing Partner Partner

Valentin Trofin holds a Bachelor of Law degree (1998) and a Master’s Oana joined our team in 2013 as a senior associate. Currently, she
degree in International Commercial Arbitration (2014), both from the coordinates the litigation department of our law firm.
Law School of the University of Bucharest. He also holds a Diploma
Oana graduated Law School in Bucharest in 2006 and holds a
in International Commercial Arbitration from the Chartered Institute of
Business Law LL.M. from Nicolae Titulescu University. She was
Arbitrators (2014). Valentin Trofin is a Ph.D. candidate at the Doctoral
admitted to the Bucharest Bar in 2008 and in the last five years has
Law School of Titu Maiorescu University.
attended several events on construction law in order to extend and
Valentin Trofin is admitted to the Bucharest Bar Association (1999), develop best practice solutions for our clients.
the National Association of Authorized Romanian Valuers (2003) and
Oana advises important companies, both employers and contractors, in
to the Romanian National Union of Insolvency Practitioners (2010).
all stages of construction projects, regarding construction management,
He is also a member of the International Bar Association, Society of
risk management, strategic project advice, material supply and other
Construction Law (UK), Romanian Society of Construction Law and a
relevant issues. She has also been involved in important and complex
founding member and Treasurer of the Bucharest Arbitration Network.
construction cases, having as their subject important and foreign
Valentin Trofin is experienced in corporate transactions and project elements, in front of the highest Romanian courts.
financing with a focus on construction, real estate development and
Her experience relates to FIDIC agreements and other construction
both commercial and investment arbitration. His continuing legal
agreements, being specialised in negotiations and pre-court matters.
education includes participation in training courses, seminars and
She assists clients in preparation for imminent litigation or amicable
conferences related to both FIDIC contracts, including the YPMTP
settlement of court cases with an unfavourable prognosis.
2012, and international commercial arbitration.
Also, since 2016, Oana has been part of the Romanian arbitration
Mr. Trofin regularly represents companies, both domestic and
team in an investment arbitration case handled by the International
international, in cross-border transactions, especially in Turkey, the
Centre for Settlement of Investment Disputes of Washington involving
Russian Federation, North Africa and the Republic of Moldova.
major privatisation, insurance/reinsurance and insolvency issues.
In 2001, Valentin Trofin decided to start his own practice and founded his Law Office with another two exceptional lawyers, who handled the firm’s
practice. In the following year, Iulia Trofin joined the practice as a full-time lawyer.
In 2003, Valentin Trofin and Iulia Trofin decided to set up a professional law firm having both of them as founders.
Trofin & Asociatii was founded in March 2003 as a boutique law firm specialised in the construction industry and corporate law. Immediately after
that, in 2004, the firm become well known for its professionalism and leading voice in construction projects and real estate development. Since then,
the firm’s practice has increased, now being experienced in mergers and acquisition, intellectual property, employment law, real estate development,
insurance claims, banking & finance, public procurement, international commercial or investment arbitration and domestic litigation.
Since 2003, Trofin & Associates had been involved in more than 50 construction or real estate development projects with values ranging from EUR
10 million to EUR 70 million.
Since 2007, the firm was involved in many cross-border transactions, especially in Turkey, the Russian Federation, North Africa and the Republic of
Moldova. The firm has great experience in dispute resolution including international commercial arbitration, having been involved in more than 30
cases of domestic or international arbitration.
Every year the firm’s dispute resolution practice represents, on average, clients in more than 70 litigation and arbitration cases, with a peak in
2009–2012 when they were involved in more than 200 litigation and arbitration cases each year.
In 2016, the Romanian Government appointed them, as co-counsel, to represent Romania in an investment arbitration in a dispute worth hundreds
of millions of Euros under the rules of ICSID Washington D.C. (USA).
The lawyers in our firm have a strong academic background, and are frequent speakers at workshops and international conferences.

Chapter 24
Serbia Slaven Moravčević
Moravčević Vojnović i Partneri

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

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

into the main agreement within a certain period of time). 1.6 Is the employer legally permitted to retain part of
1.4 Are there any statutory or standard types of insurance are substantially complete; and/or (b) any agreed
which it would be commonplace or compulsory to defects liability is complete?
for contractors in respect of death and personal Yes. Most commonly, retention is partially released once
injury, or is there a requirement for the contractor to construction works are taken over by the employer (one-half) and
have contractors’ all-risk insurance? upon expiration of the defect liability period.
Most commonly, works are insured under CAR (Contractors’

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

In accordance with the PCA, during the execution of works, the

investor must ensure statutory supervision of the works. Statutory 2.3 Are the parties permitted to agree in advance a fixed
supervision covers the obligation to review technical documentation, sum (known as liquidated damages) which will be
to control and assess the compliance of the works with the technical particular breaches, e.g. liquidated damages for late
documentation, to review regulations, standards and quality, completion? If such arrangements are permitted, are
and to take appropriate measures with respect to the contractor. there any restrictions on what can be agreed? E.g.
Accordingly, statutory supervision may also mean undertaking does the sum to be paid have to be a genuine pre-
Serbia
measures of suspension.
However, most commonly the right of suspension is retained under financial loss suffered?
the authority of the employer.
Yes. Under Serbian law, “liquidated damages” are known as
2.2 Are employers entitled to provide in the contract that contractual penalties for delay and may be agreed as a penalty
they will pay the contractor when they, the employer, for late completion for the total works and/or milestones in the
have themselves been paid; i.e. can the employer execution of the works. Also, parties commonly stipulate a cap/
paid” clause?
maximum amount for contractual penalties for delay, payable by the
contractor to the employer.
Yes, these types of back-to-back clauses, as well as back-to-back The Serbian Contracts and Torts Act, however, prescribes certain
agreements, are allowed and not uncommon in practice in Serbia. limitations concerning caps/limitations on liability of contractual
penalties/damages.
Under Serbian law, there is no concrete/mandatory rule or regulation
under which the court would request the employer to pay the Initially, the agreement stipulating the maximum amount of
contractor amounts due regardless of an “if and when” clause. compensation shall be valid, provided that the agreed amount is
not in blatant disproportion to the damage and unless otherwise
The validity and enforceability of an “if and when” clause could
provided by law for the case at hand.
be claimed under one of the main principles prescribed by the
Serbian Contracts and Torts Act; specifically the “autonomy of the Also, in the case that the damage suffered by the creditor is more
parties’ will”, with respect to contractual relations. This would extensive than the amount of agreed contractual penalty, the
apply especially in the case where parties were free to negotiate the creditor is entitled to request the difference up to the total amount of
contract. Conversely, non-negotiable agreements (called “ugovori damages. This standpoint was confirmed by the High Commercial
po pristupu”) are interpreted in favour of the person adhering to Court of the Republic of Serbia in its decision Pž. 3970/08, dated 11
such an agreement. It is predominately known in Serbia as “in November 2008.
dubio contra stipulatorem”. However, the parties are not entitled to exclude or limit in
However, when a party to a bilateral agreement fails to fulfil its advance liability in the case of fraud, deliberate default or reckless
obligations, the other party may, unless provided otherwise, request misconduct by the defaulting party. Moreover, the competent
fulfilment of these obligations, and is entitled to compensation of court, at the request of an interested party, may annul a contractual
damages in any event. provision even for simple negligence if such limitation of liability
is the result of a dominant position of the debtor or, otherwise, of
In addition to the above and the general principles of the Obligations
unequal positions of the contracting parties.
Act (e.g. the good faith argument), a contractor could claim payments
on account of works that were duly executed and taken over by A contractual cap on liability is also valid unless the set amount is
the contractor on the basis of the claim for unjustified enrichment. in obvious disproportion to the damages sustained. Also, where a
Pursuant to the Obligations Act, after a part of a person’s property maximum amount of damages has been agreed, the creditor shall
is transferred in any way to another, and such transfer has no legal be entitled to seek full compensation should the inability to fulfil
grounds, the person acquiring the property in such a way is bound an obligation be caused by the debtor’s wilful misconduct or gross
to restitute it, and where impossible, to compensate the value of the negligence.
benefits gained. In addition to the foregoing specific rules, limitation of liability
Legal doctrine has also confirmed that a contractor is entitled to clauses, as well as any other contractual provisions, could be
recompense where work is carried out at the request (express or challenged based on certain general principles set forth in the
implied) of the principal and, for any reason, there is no right to Serbian Contract and Tort Act (e.g. the principle of fairness, equal
payment under the contract. The contractor would receive the benefit consideration, etc.).
of such work, and it would be unjust if the employer were to retain
the benefit without paying the contractor for the work. The same 3 Common Issues on Construction
approach has been admitted in certain cases in which it was held by
Contracts
the court/tribunal that unjustified enrichment may be available to the
contractor in the case that no remedy is available under the contract.
The employer is entitled to vary the works to be done by the

contractor in quantity and/or quality and/or type. The applicable
laws do not prescribe a limit on variation procedures; however,
in the case such a variation would have an impact on the time
for completion and/or price of the works, such change should be
approved by the contractor.

In Serbia, in practice, variations are generally ordered by the limitation period) for mutual contractual claims in the sphere of
employer as instructions without a proper assessment of the impact the sale of goods and services, known as commercial contracts.
on price and time required for the execution of the works. Unenforceability due to the statute of limitations shall begin to run
on the first day following the day the creditor was entitled to request
fulfilment of the obligation.
party to do it? 3.7 Who normally bears the risk of unforeseen ground
Serbia
conditions?
The works can be omitted from the contract by the employer or
the third party administrating the contract (e.g. the engineer). The The risk of unforeseen ground conditions is most commonly
manner and conditions for omission are determined on a contractual regulated contractually.
basis and are most often done in the form of variations. In a standard construction contract and design and build contracts,
In addition, the omission can be applied in the form of an annex to the the risk of unforeseen ground conditions is borne by the employer.
contract (requiring signature of both parties) or partial termination. On the other hand, in turnkey projects, such risk is shifted to the
contractor.
3.3 Are there terms which will/can be implied into a However, based on applicable laws, the unforeseen ground
construction contract? conditions may also qualify as changed circumstances under Serbian
law, which would allow termination of the contract.
Construction contracts must contain key/essential elements (among
other definitions of the works, prices and terms) to be deemed 3.8 Who usually bears the risk of a change in law
applicable. affecting the completion of the works?
All other terms must be agreed on a contractual basis or prescribed
under mandatory provisions of Serbian law, being the law of the Usually, each party bears the risk of a change in law affecting their
country where the works are executed. scope of obligations under the contract.
However, in case a change in the law affects the permissibility of
3.4 If the contractor is delayed by two events, one the execution of the works, such risk would most likely lie with the
fault of the contractor and one the fault or risk of employer.
It is also worth mentioning that changes in the law may also be
concurrent delay? qualified as legal grounds for termination of/addendum to the
contract.
Serbian laws and regulations do not prescribe a mechanism for However, some construction contracts (with the state or government
calculating penalties in case of concurrent delays. authorities) also have stabilisation clauses in this respect.
In practice, however, the contractor is commonly granted an
extension of time and/or the costs occasioned by the concurrent 3.9 Who usually owns the intellectual property in relation
delay in case the delay of the employer was such to directly to the design and operation of the property?
cause the delay of the contractor. In other words, in cases where
the contractor, due to acts and/or omissions of the employer, was Pursuant to the Law on Intellectual Property, intellectual property
directly prevented from executing the works in a timely manner. (IP) rights are defined as both material and moral rights (personal
rights of the author).
3.5 If the contractor has allowed in his programme a The moral segment of IP rights is not transferable and thus is
period of time (known as the float) to allow for his own retained by the author. Therefore, it may be deemed that IP rights
delays but the employer uses up that period by, for over the design and the works pertain to the architect. Consequently,
example, a variation, is the contractor subsequently pursuant to the law, such fact triggers the obligation of the employer,
in the case it wishes to change the main design/construction, to
address the same architect to undertake respective changes.
However, the material segment of IP rights is transferable, and
The concept of variations during the float is not established in
conditions of such a transfer/assignment should be addressed in the
regional construction practice, and thus must be observed on a case-
contract with the employer.
by-case basis, taking into consideration specific circumstances.

against each other? How long is that period and from The general right of the contractor to suspend works is not regulated
what date does time start to run? under Serbian law; however, it may be subsumed under one of the
basic principles of the Serbian Contracts and Torts Act.
Such limits arise out of the Serbian Contracts and Torts Act and are Namely, pursuant to said law, in bilateral agreements neither party
applied to construction contracts. is obliged to fulfil its obligation if the other party fails to fulfil or is
Claims shall become unenforceable after a 10-year period (the not ready to simultaneously fulfil its obligation, unless otherwise
general limitation period is one in which all the rights expire and agreed or legally defined.
that applies unless a right is not anticipated in another period of In light of the applicable law, it may be argued that the contractor
limitation) and a three-year period (special limitation periods are set is entitled to suspend works due to non-payment by the employer.
for individual subjective rights which are shorter than the general

absence of characteristics required for its normal use; (ii) absence

3.11 On what grounds can a contract be terminated? Are of characteristics required for its particular uses; (iii) absence of
there any grounds which automatically or usually characteristics that were agreed upon; and (iv) non-conformity with
the model or sample. However, this liability can be excluded or
expressly? limited in the contract.
The grounds and procedure for termination are most commonly 3.14 Can one party (P1) to a construction contract which
Serbia
agreed between the respective parties and regulated under the owes money to the other (P2) set off against the sums
construction contract. due to P2 the sums P2 owes to P1? Are there any
Based on Serbian law, a contract (including a construction contract)
may be terminated due to non-fulfilment of the parties’ obligations.
Set-off of claims is generally permissible under Serbian law.
Depending on whether the term for fulfilment of the parties’
obligations is an essential element of the contract or not, the party According to the Serbian Contracts and Torts Act, a debtor may set
terminating the contract may be required to leave an additional term off the claim by a creditor against him with his claim against the
for fulfilment of obligation of the breaching party. creditor. In order to do so, the Obligations Act provides conditions
that need to be fulfilled:
(i) both claims have to be of a monetary nature, or other
replaceable goods of the same nature and kind;
the injured party? Is it usual/possible to argue (ii) both claims have to be due; and
successfully that a contract which has become (iii) one party must declare to the other its intention for set-off
uneconomic is grounds for a claim for force majeure? (i.e. to send a written notice on set-off).
Upon the notice set-off being dispatched, the settlement will be
Serbian law does not know the concept of force majeure as such, but considered effectuated upon fulfilment of the conditions set forth
instead applies it through specific legal concepts such as “inability under points (i) and (ii) above.
to perform” or “change in circumstances”, which are regulated by
Upon set-off, the contractor/employer may initiate the proceedings
the Serbian Contracts and Torts Act and mainly constitute grounds
against the party that performed set-off, claiming that the claim and/
for termination of, or amendments to, an agreement.
or value thereof was unjustified.
Specifically, as a general rule, where the fulfilment of obligations by
In order to support its claims, the claimant shall have the burden
one of the parties to a bilateral agreement has become impossible due
of proving the facts relied on, i.e. the insubstantiality of the set-
to events not attributable to either of the parties, the counterparty’s
off of claims with regard to the contract. On the other hand, the
obligations are then also cancelled out; if such a counterparty
compensatory objection stands for the respondent in the proceedings.
has fulfilled a part of its obligations until that time, it may claim
reimbursement according to the rules governing the reimbursement
of benefits acquired groundlessly. Accordingly, in the case of 3.15 Do parties to construction contracts owe a duty of
partial inability to perform due to events not attributable to either care to each other either in contract or under any
of the parties, the counterparty may terminate the agreement if the other legal doctrine?
partial performance does not correspond to its needs; otherwise the
agreement remains in force and the counterparty may request a pro Duty of care may be subsumed under the basic principle of the
rata reduction of its obligations. Serbian Contracts and Torts Act, and thus applied. However, the
extent of this principle differs from its common law concept.
As a rule, in the case referred to above, the agreement is terminated
out of court.
Force majeure itself is in theory usually defined as an outside 3.16 Where the terms of a construction contract are
interference whose effect could not have been foreseen, avoided or ambiguous, are there rules which will settle how that
eliminated.
The basic principle of interpretation that shall be applied in

3.13 Are parties which are not parties to the contract accordance with Serbian law is the original intent of both parties.
which is made for their benefit? E.g. is the second or However, in the region it is mainly recognised for types of non-
subsequent owner of a building able to claim against negotiable agreements (called “ugovori po pristupu”), which are
the original contracts in relation to defects in the interpreted in favour of the person acceeding to such agreement; in
building? principle, known as “in dubio contra stipulatorem”.
According to case law, the contractor and the employer are deemed
jointly and severally liable towards the buyer for damage caused are unenforceable?
in relation to the construction. In accordance with the PCA, the
employer, the contractor and the designer are all liable towards the
The FIDIC Conditions of Contract contain certain provisions
buyer.
that may be challenged from the perspective of local law in the
Furthermore, pursuant to the Serbian Contracts and Torts Act, proceeding (e.g. limitation of liability); however, the risk of such a
the seller (the employer) is liable for the following material challenge is low.
defects of a building at the moment risk passes to the buyer: (i)

Disputes are resolved in Serbia by a sole arbitrator or by an

3.18 Where the construction contract involves an element arbitration tribunal. The decisions rendered in the arbitration are
of design and/or the contract is one for design only, binding.
limits on the extent of his liability? In particular, does Arbitration can be conducted as ad hoc or institutional. The
the designer have to give an absolute guarantee in Foreign Trade Court of Arbitration is located in Belgrade and has
respect of his work? administrated thousands of cases so far.
Besides those mentioned above, mediation is another alternative
Serbia
If not agreed otherwise, it is an employer’s obligation to provide dispute mechanism which is available in Serbia. A mediator is a
construction plans/designs and a contractor’s obligation to carry neutral person who helps the parties to come to an agreement in
out works according to the plans/designs. Therefore, an error in relation to the dispute at hand. A mediator’s position can be formal
the design is an employer’s liability. If the employer trusted the or informal and he/she does not render a decision that is binding;
preparation of designs to a third person (a designer/architect), then rather, he/she helps the parties to find the solution by themselves.
the designer/architect shall be individually and fully liable towards
the employer for damage that occurred due to errors in the design (the
error of the design has to be notified to the employer). If the error 4.3 Do your construction contracts commonly have
in design results in a defect in the building that affects its solidity,
the designer shall be liable for any defect that shows within ten (10)
years.
Yes, given that court practice in the area of construction law is
In case both the contractor and the designer are liable, their liability undeveloped in Serbia, most construction contracts contain an
will be measured proportionally to their respective faults. arbitration clause and thus disputes are referred to arbitration.
The parties to a contract cannot exclude or limit decennial liability. As stated above, arbitration is conducted as ad hoc or institutional,
In light of the above, decennial liability shall be applied to the depending on the dispute’s value and parties’ agreement.
architect and/or engineering consultant in respect of its design Commercial entities in Serbia will likely agree on some of the very
(design error), notwithstanding that the works are executed by a common arbitration rules, such as those set by the United Nations
different person, and not on a design and build basis. Also, and on Commission on International Trade Law (“UNCITRAL”), the
the same principles, the contractor is held liable for the structural International Chamber of Commerce (“ICC”) and the London Court
defects of construction works, even if such defects were a result of of International Arbitration (“LCIA”).
a design error.
However, contractually, on a case-by-case basis, mutual liabilities 4.4 Where the contract provides for international
and indemnifications in relations between contractors/employers/ arbitration, do your jurisdiction’s courts recognise
designers may be tailor-made and adjusted to the specific and enforce international arbitration awards? Please
circumstances of the case, especially in view of the person liable advise of any obstacles to enforcement.
to cover the correction of design errors and/or the rectification of
defects in works that resulted due to such errors. Serbia signed the New York Convention on the recognition and
The contractor can, however, be liable for design errors if he noticed enforcement of foreign arbitral awards and has accepted its
an error in design and failed to notify the employer (omission of principles and norms. That means that in Serbia all foreign arbitral
notification duty). A contractor is obliged to review the design with awards will have the same treatment, regardless of whether or not
due diligence. they come from a state that is a New York Convention signatory.
The reasons for refusal of recognition and enforcement of the foreign
arbitral award are listed in the Convention and are as follows:
■ Considered only at the request of the party against whom it is
invoked:
4.1 How are disputes generally resolved? 1. the arbitration tribunal did not have the jurisdiction;
2. the right of defence was not respected;
In Serbia, disputes are generally resolved by the courts. In recent 3. the arbitrators decided beyond their authorisation;
years, however, other dispute resolution mechanisms have become 4. the arbitral procedure was not in accordance with the
increasingly popular. One such method, arbitration, finds general parties’ agreement; or
applicability in commercial disputes. On the other hand, there is 5. the arbitration award was not final.
also an intention to resolve disputes through the involvement of a
■ Considered ex officio by the competent court:
neutral third person acting as a mediator.
1. the subject matter was not capable of being settled before
the arbitration; or
4.2 Do you have adjudication processes in your 2. the decision was contrary to public policy.
procedures.
Litigation still has primacy when considering all the types of in a foreign country, will the judgment of that foreign
disputes. Litigation is governed by the Serbian Litigation Act and
can be led by a single judge or a chamber (depending on the type of
dispute and its value). Serbian law dealing with the issue of the enforcement of foreign
court awards prescribes several reasons for a refusal of their
As one of the most common adjudication processes, arbitration is
enforcement; among others, the lack of reciprocity.
the most important alternative to litigation as a state adjudication.

In Serbia, the judge would normally schedule the preliminary

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

Slaven Moravčević Ivana Panić

Moravčević Vojnović i Partneri Moravčević Vojnović i Partneri
in cooperation with Schoenherr in cooperation with Schoenherr
Dobračina 15 Dobračina 15
SRB-11000 Belgrade SRB-11000 Belgrade
Serbia Serbia
Tel: +381 11 3202 600 Tel: +381 11 3202 600

Serbia
Fax: +381 11 3202 610 Fax: +381 11 3202 610

Email: s.moravcevic@schoenherr.eu Email: i.panic@schoenherr.eu
URL: www.schoenherr.rs URL: www.schoenherr.rs
Slaven Moravčević is a partner with Moravčević Vojnović i Partneri Ivana Panić specialises in construction law with emphasis on FIDIC
in cooperation with Schoenherr specialising in M&A, real estate, Conditions of Contract, along with real estate and construction
telecommunications and energy, and heads the firm’s operations in arbitration. Given that construction law/FIDIC is her main area
Montenegro. In addition, Slaven is head of Schoenherr’s Real Estate of expertise, Ivana has been engaged in all the firm’s FIDIC-
practice group. He has 15 years’ experience in real estate development related projects on various project sides (investors, contractors
projects. He is active across different sectors and regulated industries, and subcontractors) in different industries, such as power plant
including the energy, financial services, infrastructure, insurance, construction and hotel/resort development. Ivana acts as the local
telecommunications, media and pharmaceutical industries. Slaven FIDIC trainer with the Serbian Association of Consulting Engineers
also acts as general counsel to the Government of Montenegro on all (FIDIC). Ivana has been with the firm since 2009.
large-scale property investment projects.
Moravčević Vojnović i Partneri in cooperation with Schoenherr has been active in the Serbian market since 2002. The firm’s practice is client-
orientated, with specialised practice groups that provide industry-focused services to meet the demands of a competitive, developing and rapidly
changing marketplace. The firm’s client list includes leading companies, financial institutions, organisations and governments. The Belgrade office,
via its specialised country desks, acts as a hub for Bosnia-Herzegovina, Macedonia and Montenegro.
Schoenherr is a leading full-service law firm in Central and Eastern Europe. About 300 professionals service national and international clients from
our offices in Austria, Belgium/EU, and throughout the entire CEE region. As one of the first international law firms to move into CEE, we have grown
to be one of the largest firms in the region.

Chapter 25
Singapore
Allen & Gledhill Ho Chien Mien
the construction industry, offers are commonly provided by way

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

Allen & Gledhill Singapore
The party that procured the bond may attempt to stop the
1.5 Are there any statutory requirements in relation beneficiary’s call on an on-demand bond by applying for an
to construction contracts in terms of: (a) general injunction. To succeed, the applicant must prove either fraud or
unconscionability.
sub-contractors); (c) tax (payment of income tax of “Unconscionability” is an equitable concept unique to Singapore.
employees); or (d) health and safety? It involves an act of unjustifiable unfairness by the party calling on
Singapore
the on demand bond.

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

the SOPA.

2. an employer will not prevent a contractor from performing

2.3 Are the parties permitted to agree in advance a fixed his obligations under the construction contract (Evergreat
sum (known as liquidated damages) which will be Construction Co Pte Ltd v Presscrete Engineering Pte
paid by the contractor to the employer in the event of Ltd [2006] 1 SLR(R) 634; TT International Ltdv Ho Lee
particular breaches, e.g. liquidated damages for late Construction Pte Ltd [2017] SGHC 62).
Singapore
does the sum to be paid have to be a genuine pre- 3.4 If the contractor is delayed by two events, one the
estimate of loss, or can the contractor be bound to fault of the contractor and one the fault or risk of
pay a sum which is wholly unrelated to the amount of his employer, is the contractor entitled to: (a) an
financial loss suffered? extension of time; or (b) the costs occasioned by that
concurrent delay?
Yes. A liquidated damages clause will only be enforced if the
liquidated damages provided for are genuine pre-estimates of The position in Singapore with regard to extensions of time for
the losses likely to flow from the breach. Note that reasonable concurrent delays remains unsettled. On this issue, Commonwealth
liquidated damages are likely to be recoverable in scenarios where it cases are instructive and have persuasive value. In Henry Boot
is not possible to estimate the losses that may be suffered, e.g. public Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999)
infrastructure projects. Con LR 32 (“Malmaison”), if there are two concurrent causes of
delay, one of which is a relevant event allowing for time extension
and the other is not, the contractor is entitled to an extension of time
3 Common Issues on Construction for the period of delay caused by the relevant event, notwithstanding
Contracts the concurrent effect of the other. In contrast, the position in the
Scottish case of City Inn Ltd v Shepherd Construction Ltd [2007]
CSOH 190 (“City Inn”) is that, if there are concurrent causes of
3.1 Is the employer entitled to vary the works to be done delay, the delay should be apportioned as between the relevant
event and the contractor’s risk events. However, City Inn has been
rejected in the context of a JCT Standard Form of Building Contract,
Generally, the employer is entitled to order variations if there is a in the recent case of Walter Lilly & Co Ltd v Mackay and Another
variation clause in the construction contract. However, the employer [2012] EWHC 1773 (TCC), which instead upheld the application
usually will not be able to order variations once the certificate of of Malmaison in England. As such, it is likely that the Malmaison
completion has been issued. The contractor is also not required approach will be highly persuasive in the Singapore courts. Of note
to undertake works beyond the scope of the variation clause itself, is the local case of PPG Industries (Singapore) Pte Ltd v Compact
which typically defines a variation as any addition, reduction or Metal Industries Ltd [2013] SGCA 23, where the Court of Appeal
substitution to the works. Such variations cannot substantially found concurrent delay and granted an extension of time to the
change the nature of the contract. contractor, but without any discussion of any of the above cases.
There is no Singapore authority on the contractor’s entitlement
3.2 Can work be omitted from the contract? If it is to recover prolongation costs occasioned by concurrent delay. A
omitted, can the employer do it himself or get a third leading author on construction law in Singapore, Chow Kok Fong
party to do it? states that “[i]t is arguable that given that the contractor would have
been in some default, it seems inequitable that he should be entitled
Yes. Standard form contracts such as the SIA Conditions and to recover for these damages or expenses”, but “if the contractor
PSSCOC contain clauses that allow an employer to omit works is unable to establish that the employer events are the dominant
from the contract. However, an employer generally cannot omit cause of the loss, it may be possible to apportion loss between the
works such that the contractor is deprived of the substantial benefit causes…” (Chow Kok Fong, Law and Practice of Construction
th
of such works. If the omission has changed the character of the Contracts (Sweet & Maxwell Asia, 4 Ed, 2012) p. 608). However,
contract substantially, the contractor may allege that the omitted in practice and by contractual provision, contractors are usually not
work amounts to a change in the scope and nature of the contract. In allowed to claim for costs arising out of any extension of time as a
practice, however, the employer and contractor may reach a mutual result of concurrent delay.
agreement as to the omission of the works.
Subject to the above and any prohibition in the contract, the 3.5 If the contractor has allowed in his programme a
employer may then carry out the omitted works himself or engage a period of time (known as the float) to allow for his own
third party to complete the said works. delays but the employer uses up that period by, for
3.3 Are there terms which will/can be implied into a after this float is used up?
While the Singapore Court of Appeal has generally defined “float”
Examples of terms that are typically implied under statute include: time as “time [that] caters for contingencies occasioning delay
1. a contractor’s right to refer payment-related disputes to and is also for purpose of coordination and interfacing of different
adjudication (Section 12 of SOPA); or trades” (Jurong Engineering Ltd v Paccan Building Technology
2. a contractor’s right to suspend performance for non-payment Pte Ltd [1999] 2 SLR(R) 849, [41]), there is no clear Singapore
(Section 26 of SOPA). authority on the point of whether a contractor whose float has been
Terms may also be implied under common law, such as: used up by the employer is subsequently entitled to an extension of
time if he is then delayed.
1. an employer’s obligation to do all that is necessary on his part
to bring about completion (Evergreat Construction Co Pte Ltd However, local case law suggests that “float” time should not be
v Presscrete Engineering Pte Ltd [2006] 1 SLR(R) 634); or used up by acts of delay by the employer. For example, it was

suggested as obiter in Lian Soon Construction Pte Ltd v Guan Qian

Realty Pte Ltd [1999] 3 SLR(R) 518 at [31] that: “[i]t is arguable 3.9 Who usually owns the intellectual property in relation
that the float time is in principle not available for accommodating to the design and operation of the property?
variations and delays emanating from the employer or other delay
events in respect of which the contractor is entitled to extension Generally, the creator of a piece of work owns the copyright of
under the contract.” that work. However, where the work was created by the person
in the course of his employment, the employer would generally be
Singapore
the owner of the copyright in that work. Therefore, technical or

commercial information created by the architects or engineers of
the employer would usually belong to the employer. Usually, this is
what date does time start to run? dealt with in the contract provisions.
Under the Limitation Act (Cap. 163), the usual limitation period for 3.10 Is the contractor ever entitled to suspend works?
an action in tort or contract would be six years from the date on
which the cause of action accrued. In respect of latent damage, the Yes. A contractor may suspend work if the contract confers on
limitation period is either six years from the date on which the cause the contractor a right to do so. Typically, contracts may permit
of action accrued, or three years from the earliest date on which suspension on account of:
the claimant first had both (i) the knowledge required for bringing 1. a serious breach (typically in relation to certification and
an action for damages in respect of the relevant damage, and (ii) a payment terms of the contract) by the employer; and
right to bring such an action. Note that the law on when a particular
2. the architect’s failure to issue a certificate, save for an
cause of action arises is quite complicated – and is dependent also interim certificate (e.g. clause 33(4) of the SIA Conditions).
on which cause of action is relied upon – e.g. negligence, breach of Separately, sections 23 and 26 of the SOPA entitle a contractor
contract, breach of statutory duty, etc. to stop work in the event of the employer’s failure to pay an
This is, however, subject to a 15-year long-stop limitation. adjudicated amount following the rendering of an adjudication
determination in the contractor’s favour.
Otherwise, there is no common law right to suspend work (Jia Min
conditions? Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R)
288).
In Resource Piling Pte Ltd v Geospecs Pte Ltd [2014] 1 SLR 485,
Quentin Loh J stated at [66] that: 3.11 On what grounds can a contract be terminated? Are
“[I]n the context of the Singapore building and construction there any grounds which automatically or usually
industry, the risk of adverse subsoil conditions is variably
borne by the contractor. None of the standard building
expressly?
contract forms commonly in use in Singapore provide
otherwise. This is the well-known and accepted commercial
environment of long standing…” In addition to any express grounds for termination in a contract, the
For instance, Clause 5.1 of the PSSCOC states that the risk of usual grounds on which an innocent party is entitled to terminate
unforeseen ground conditions lies with the contractor. However, a contract include (i) such party’s common law rights to terminate
Clause 5.2 of the PSSCOC allows the contractor to recover for the other party’s repudiation of performance (or abandonment),
additional costs incurred as a result of adverse physical conditions (ii) where there is a breach of a condition, or (iii) where the breach
which could not have been reasonably foreseen by an experienced in question deprives the innocent party of substantially the whole
contractor. benefit of the contract, save where the term expressly, clearly
and unambiguously states that any breach of it, regardless of the
seriousness of the consequences to follow, would never entitle the
3.8 Who usually bears the risk of a change in law innocent part to terminate the contract (RDC Concrete Pte Ltd v
affecting the completion of the works? Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413; Sports Connection
Pte Ltd v Deuter Sports GmbH [2009] 3 SLR(R) 883).
A change in law is a risk that is typically allocated between the
parties using force majeure clauses.
There is no clear Singapore authority addressing the issue of which in your jurisdiction? What remedy does this give
party should bear the risks arising out of a change in law if this is the injured party? Is it usual/possible to argue
not expressly contemplated by the contract. On one hand, there is successfully that a contract which has become
suggestion that if there is no express provision providing that the uneconomic is grounds for a claim for force majeure?
happening of such a neutral event would allow the contractor a time
extension or a claim in damages, the contractor is taken to have The concepts of force majeure and frustration are known in
accepted the legal risk of the occurrence of such an event. On the Singapore.
other hand, the Singapore courts may adopt the position expounded Parties may contractually provide for non-performance upon the
by the Supreme Court of Christchurch in New Zealand Structures & occurrence of specified force majeure events so that such non-
Investments Ltd v McKenzie [1979] 1 NZLR 515, which held that, in performance does not amount to a breach. Whether force majeure
the absence of an express clause as to who should bear responsibility arises and what rights and obligations follow such an event is subject
for additional costs occasioned by changes in statutory regulation, to a precise construction of the contractual clause itself.
it is the responsibility of the employer to vary the work and the
In the absence of a force majeure clause, the common law doctrine
contractor is entitled to additional payment for the varied work.
of frustration may excuse the non-performance of a contractor by

treating the contract as having existed until the point when the
frustrating event occurred, while any accrued rights and obligations 3.16 Where the terms of a construction contract are
remain enforceable after the frustrating event. However, the
doctrine of frustration operates only in exceptional circumstances,
where the supervening event is one that radically or fundamentally
The current approach taken by Singapore Courts for the construction
alters the contract such that it is no longer the same as what was
of contract terms is a “contextual” one (Zurich Insurance
originally entered into.
Singapore
(Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte
Ltd [2008] 3 SLR(R) 1029 (“Zurich”)). Under this approach, the
3.13 Are parties which are not parties to the contract court takes into account the “essence and attributes of the document
entitled to claim the benefit of any contract right being examined” (Zurich at [132(a)]).
Extrinsic evidence may be admitted to aid in the interpretation of the
the original contracts in relation to defects in the written words of a contract, provided that the extrinsic evidence in
building? question is “relevant, reasonably available to all the contract parties
and relates to a clear or obvious context” (Zurich at [132(d)]).
Section 2 of the Contracts (Rights of Third Parties) Act (Cap. 53B) If there is still any ambiguity in the interpretation of a clause,
allows a third party to benefit under the contract if (i) the contract the contra proferentem rule would apply and the clause is to be
expressly states the same, or (ii) the contract purports to confer construed against the party seeking to rely on it.
a benefit on him and the parties intended that the term would be
enforceable by the third party. 3.17 Are there any terms in a construction contract which
are unenforceable?

owes money to the other (P2) set off against the sums The following are examples of unenforceable terms/clauses in a
due to P2 the sums P2 owes to P1? Are there any contract:
limits on the rights of set-off? 1. clauses which exclude liability for personal injury or death
(section 2 of the Unfair Contract Terms Act (Cap. 396));
Under Singapore law, in addition to any rights conferred by the 2. “pay when paid” provisions (section 9 of the SOPA);
contract, P1 may rely on legal and equitable set-off to set off
3. liquidated damages clauses that amount to a penalty; and
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 4. provisions which might prevent the operation of the terms of
unequivocal words in a contract (Jia Min Building Construction Pte the SOPA (section 36(2) of the SOPA).
Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 288). Contracts providing
for temporary finality on the architect’s certificates may also exclude 3.18 Where the construction contract involves an element
set-offs which have not been certified by the architect (Chin Ivan v of design and/or the contract is one for design only,
H P Construction & Engineering Pte Ltd [2015] 3 SLR 124). are the designer’s obligations absolute or are there
At common law, the amount should be ascertainable and due, the designer have to give an absolute guarantee in
while in equity, the right of set-off includes unliquidated damages. respect of his work?
However, unlike legal set-off, equitable set-off needs to be
inseparably connected to the claim against which it is raised. Usually, an architect’s liability is not absolute in the sense that
the architect is liable wholly for all losses that result from the acts
of that architect. It must be shown that the architect has fallen
care to each other either in contract or under any short of the standard of the ordinary skilled person exercising and
other legal doctrine? professing to have a special skill or competence (Bolam v Friern
Hospital Management Committee [1957] 1 W.L.R. 582 at 586). In
certain circumstances, an architect may also rely on the independent
Parties to construction contracts can owe a duty of care to each other
contractor defence (MCST 3322 v Mer Vue Developments Pte Ltd
in contract, with such scope and content as contractually prescribed.
[2016] 2 SLR 793).
At the same time, a concurrent duty of care in tort may also arise if
In special circumstances, an architect can enter into a duty beyond
the test laid down in Spandeck Engineering (S) Pte Ltd v Defence that of using skill and care in carrying out design. This may occur
Science & Technology Agency [2007] 4 SLR(R) 100 is satisfied: expressly (for instance, by contract) or it may be implied that the
1. it must be factually foreseeable that a failure by one party to designer has warranted the achievement of a certain result, e.g. a
take reasonable care could result in the other party suffering fitness for purpose clause.
damages; Employers may, in practice, try to extract an absolute guarantee
2. there must be sufficient legal proximity between the parties, from designers in respect of their work. However, designers seldom
taking into account the physical, circumstantial, and causal agree to this due to difficulties in obtaining professional indemnity
proximity of the parties and their acts; and insurances in this regard.
3. there must be no policy considerations which would militate
against the establishment of a tortious duty of care. 4 Dispute Resolution
This tortious duty of care cannot be inconsistent with the terms of
the contract.
Apart from litigation, the SOPA provides for an adjudication

process to achieve a fast and low-cost settlement of payment

disputes. Disputes are also commonly resolved through arbitration. of court, in the same manner as a judgment or an order of the court
The SIA Conditions and PSSCOC both provide for this avenue (i) by an action under common law, (ii) under section 29 of the IAA,
of dispute resolution. Parties may also proceed to mediation or (iii) under section 46(3) of the AA.
before the commencement of arbitration or litigation proceedings. The Rules of Court set out the procedures for enforcing a foreign
Alternatively, arbitration or litigation proceedings may be stayed in arbitral award. Generally, an application can be made by filing an
order for parties to pursue mediation. originating summons, which is supported by an affidavit. Once leave
Singapore
is given by the court to enter judgment on an application to enforce

4.2 Do you have adjudication processes in your the award, the other party has 14 days to challenge the leave granted.
jurisdiction? If so, please describe the general Enforcement of international arbitration awards from arbitrations
procedures. seated in Singapore may be refused on either the grounds set out
in Article 34 of the UNCITRAL Model Law on International
Yes, there is a mandatory statutory adjudication procedure under Commercial Arbitration, or section 24 of the IAA (PT First Media
the SOPA applicable to most types of construction works. An TBK v Astro Nusantara International BV [2014] 1 SLR 372).
adjudication typically occurs in the following manner: Enforcement of all other foreign awards may only be refused on the
1. The contractor may activate the adjudication process by grounds set out under section 31 of the IAA.
serving a payment claim on the employer.
2. The employer is required to provide a payment response 4.5 Where the contract provides for court proceedings
stating, amongst other things, the response amount and, if the in a foreign country, will the judgment of that foreign
response amount is less than the claimed amount, the reason court be upheld and enforced in your jurisdiction?
for the difference and the reason for any amount withheld.
3. If the contractor to a construction contract disputes the payment Generally, yes. Foreign judgments may be enforced in Singapore
response issued by the employer, or if the employer failed to under the:
provide a payment response within the period stipulated by
the SOPA, the contractor is entitled to make an adjudication 1. Reciprocal Enforcement of Commonwealth Judgments
Act (Cap. 264) (“RECJA”): Facilitates the enforcement of
application after a stipulated period.
judgments or orders of superior courts of the Commonwealth
The adjudication process is designed to determine the quantum countries.
of payment quickly and economically without the full length of 2. Reciprocal Enforcement of Foreign Judgments Act (Cap.
arbitration or litigation. Typically, the adjudication process can be 265) (“REFJA”): Facilitates the enforcement of judgments by
completed within a few weeks. superior courts of non-Commonwealth countries which have
been gazetted under the REFJA.
4.3 Do your construction contracts commonly have 3. Common law: Facilitates the enforcement of foreign
arbitration clauses? If so, please explain how judgments which fall outside the ambit of RECJA and REFJA.
arbitration works in your jurisdiction. Under the RECJA and REFJA, only foreign judgments or orders
made by a foreign court in civil proceedings whereby any sum of
Yes. The SIA Conditions, PSSCOC and REDAS Conditions contain money is made payable are enforceable.
arbitration clauses. Under the common law, an in personam final and conclusive foreign
A dual arbitration regime exists in Singapore. Domestic judgment rendered by a court of competent jurisdiction, which is
arbitrations are governed by the Arbitration Act (Cap. 10) (“AA”) also a judgment for a definite sum of money, is enforceable in
and international arbitrations are governed by the International Singapore provided, inter alia:
Arbitration Act (Cap. 143A) (“IAA”). Many provisions in the 1. it was not procured by fraud;
two statutes are similar. Nonetheless, the main distinctions are as 2. its enforcement would not be contrary to public policy;
follows: 3. its enforcement would not be an enforcement of foreign penal,
1. Stay of court proceeding in favour of arbitration. Under revenue or other public laws; or
the domestic arbitration regime, the court has discretionary 4. the proceedings in which it was obtained were not contrary to
power as to whether to grant a stay where one of the parties natural justice.
commenced court proceedings in contravention of an
arbitration agreement. However, under the international
arbitration regime, it is mandatory for a court to grant a stay 4.6 Where a contract provides for court proceedings in
if the court is satisfied that there is an arbitration agreement, your jurisdiction, please outline the process adopted,
unless such an agreement is null and void, inoperative or any rights of appeal and a general assessment of
incapable of being performed. how long proceedings are likely to take to reduce: (a)
2. Appeal against an award. Under the domestic arbitration decision by the final court of appeal.
regime, a party who is dissatisfied with an arbitral award may
appeal to the court. This right to appeal is limited to questions of
law arising out of an award made in the proceeding. Under the An action is commenced with the claimant’s personal service of
international arbitration regime, there is no right of appeal at all. a copy of a writ or any other originating process (supported by 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 are exchanged,
and enforce international arbitration awards? Please discovery, the exchange of affidavits of evidence-in-chief and expert
advise of any obstacles to enforcement. reports (if necessary), and setting down for trial occur. A party may
file an appeal within one month of the rendering of the judgment.
Yes. Singapore is a signatory to the 1958 New York Convention Typically, as construction disputes involve large volumes of evidence
on the Recognition and Enforcement of Foreign Arbitral Awards. and require the provision of expert evidence, the time required to
Thus, an international arbitration award may be enforced, with leave resolve such disputes may vary between 12 and 24 months.

Ho Chien Mien
Allen & Gledhill LLP
One Marina Boulevard
#28-00
Singapore 018989
Tel: +65 6890 7502
Singapore
Email: ho.chienmien@allenandgledhill.com
URL: www.allenandgledhill.com
Chien Mien undertakes a wide range of contentious and non-

contentious construction and engineering-related work. On the
contentious side, he has extensive litigation, arbitration, adjudication
and mediation experience – both domestic and international. On
the non-contentious side, he has been involved in some of the
largest building and infrastructure projects in Singapore and Asia
Pacific, including greenfield developments of power and utilities
plants, oil storage terminals, LNG terminals and regasification plants,
petrochemical and pharmaceutical plants, manufacturing facilities,
mega-malls and transportation hubs, prime office towers and luxury
hotels and condominium developments.
Chien Mien was among the inaugural batch of select practitioners
to be recognised as a Senior Accredited Specialist in Building and
Construction Law by the Singapore Academy of Law. He also sits
as a senior adjudicator under the SOP Act and has been appointed
arbitrator for arbitrations administered by SIAC, ICC and the AIAC
(Asian International Arbitration Centre, formerly known as KLRCA).
Further, he has contributed to various domestic and international
publications and is the editor of the construction section of Atkin’s
Court Forms (Singapore ed.). His most recent instructions have seen
him being instructed on the development of some of the largest mixed-
development projects in Singapore and on disputes relating to the
construction of a hydroelectric power station and the modernisation of
an international airport in neighbouring ASEAN countries.
Allen & Gledhill is an award-winning full-service South-east Asian commercial law firm which provides legal services to a wide range of premier
clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the
market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which
are the first of their kind. The Firm’s reputation for high-quality advice is regularly affirmed by its strong rankings in leading publications, and by the
various awards and accolades it has received from independent commentators and clients. Together with its associate firm, Rahmat Lim & Partners
in Malaysia and office in Myanmar, Allen & Gledhill has over 450 lawyers in the region, making it one of the largest law firms in South-east Asia. With
this growing network, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond; in particular, on matters
involving South-east Asia and the Asia region.

Chapter 26
South Africa Daniel McConnell
Norton Rose Fulbright South Africa Inc. Emmanuel Tivana
have the legal capacity and intention to create binding obligations.

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

Norton Rose Fulbright South Africa Inc. South Africa
for Occupational Injuries and Diseases Act, 130 of 1993 and with advanced payment guarantees and retention guarantees. These
the Unemployment Insurance Fund under the Unemployment instruments are usually issued by banks or insurance companies.
Insurance Act, 63 of 2001. The JBCC agreement contains a standard form of performance
The following types of insurance are a common requirement in guarantee which is endorsed by the CIDB. These instruments
construction contracts: typically create primary obligations.
■ contractors’ all-risk insurance; Parent-company guarantees, in terms of which a parent company
South Africa
■ public liability insurance; guarantees the performance of a subsidiary, are also common.
■ professional indemnity insurance (if the construction work These instruments typically create secondary obligations.
also involves the rendering of professional services – e.g. The term “guarantee” in South Africa describes what is referred to
design or engineering services); and as a “bond” in England. There are no restrictions on the nature of
■ special risks insurance (strike, riot, civil unrest and/or such bonds and guarantees. The nature of such instruments (i.e.
terrorism), called SASRIA insurance in South Africa. whether they constitute primary or secondary obligations on the part
of the guarantor) is determined by reference to their wording.
to construction contracts in terms of: (a) general 1.8 Is it possible and/or usual for contractors to have
(a) There are no general statutory requirements in relation
to construction contracts. However, contractors may not
undertake work for a public sector entity unless the contractor The common law affords contractors security in the form of a lien (i.e.
is registered with the Construction Industry Development a right of retention), over works carried out until the works are paid
Board (CIDB) in terms of the CIDB Act, 38 of 2000 and has for by the employer. In order for the lien to be enforceable, payment
the necessary grading to carry out the work. In terms of the must be due to the contractor and the contractor must be in lawful
Housing Consumers Protection Measures Act, 95 of 1998, possession of the works. The lien can be superseded by the provision
no person may construct residential buildings unless they are of alternative security (e.g. provision of a conditional guarantee/bond),
registered as a home builder under the Act.
in which event the contractor must relinquish possession. Employers
(b) South Africa has a comprehensive set of labour laws with often require contractors to waive the right to rely on the lien – this is
which contractors must comply, including the Occupational particularly common in project finance transactions.
Health and Safety Act, 85 of 1993 (OHASA), the Labour
Relations Act, 66 of 1995 and the Basic Conditions of
Employment Act, 75 of 1997. Specialist labour advice should 2 Supervising Construction Contracts
be sought by contractors entering the South African market.
(c) Employers are required to deduct tax, mainly in the form of
PAYE (Pay As You Earn), from the wages of employees for 2.1 Is it common for construction contracts to be
payment to the revenue service. Employers are also required supervised on behalf of the employer by a third party?
to make deductions from employees for co-contributions Does any such third party (e.g. an engineer or architect)
to the Compensation Fund for Occupational Diseases and have a duty to act impartially between contractor and
Injuries and to the Unemployment Insurance Fund for employer? Is that duty absolute or is it only one which
unemployment social benefits for employees. exists in certain situations? If so, please identify when
(d) South Africa’s statutory health and safety requirements are the architect/engineer must act impartially.
contained in the OHASA. The Construction Regulations
(2014), published under the OHASA, contain construction- Construction contracts often provide for a professional third party
specific health and safety obligations – they are the equivalent (engineer, architect or quantity surveyor) to act as an agent on behalf
of the English “CDM Regulations”.
of the employer and supervise the works. In addition to acting as
the employer’s agent, such third party often performs quasi-judicial
1.6 Is the employer legally permitted to retain part of functions in terms of the construction contract (e.g. determining
the purchase price for the works as a retention to be claims by the contractor) in respect of which it must act impartially.
In other circumstances (e.g. when certifying payments or progress),
defects liability is complete? the third party acts as the employer’s agent but must, nevertheless,
act honestly and impartially in carrying out such functions.
Yes, such provisions are common in construction contracts. In project finance transactions, project funders usually require an
Construction contracts often provide for an on-demand retention additional person, their agent (the lender’s technical adviser), to
guarantee (or bond) to be provided by the contractor in place of a monitor the works on their behalf. The role of the lender’s technical
cash retention. adviser is to ensure that the interests of the funders are protected.
1.7 Is it permissible/common for there to be performance 2.2 Are employers entitled to provide in the contract that
bonds (provided by banks and others) to guarantee they will pay the contractor when they, the employer,
performance, and/or company guarantees provided to have themselves been paid; i.e. can the employer
guarantee the performance of subsidiary companies? include in the contract what is known as a “pay when
Are there any restrictions on the nature of such bonds paid” clause?
and guarantees?
“Pay-when-paid” clauses are presently valid and enforceable,
Contractors commonly provide on-demand performance guarantees, though they are strictly construed. Proposed regulations under the

CIDB Act (which have not yet been passed into law) will, if enacted,
prohibit pay-when-paid clauses in construction contracts. 3.4 If the contractor is delayed by two events, one the
2.3 Are the parties permitted to agree in advance a fixed extension of time; or (b) the costs occasioned by that
sum (known as liquidated damages) which will be concurrent delay?
South Africa
particular breaches, e.g. liquidated damages for late Where cause of the delay is the fault of the employer (or at his risk
in terms of the contract), the principle of prevention entitles the
does the sum to be paid have to be a genuine pre- contractor to an extension of time (EoT). There are two schools
estimate of loss, or can the contractor be bound to of thought regarding whether a contractor is entitled to monetary
pay a sum which is wholly unrelated to the amount of compensation in addition to the EoT. One school follows the current
financial loss suffered? English law position, which is that the contractor is generally not
entitled to monetary compensation in events of true concurrent
The Conventional Penalties Act, 15 of 1962, regulates the delay. The other school, based on the fact that South African law
enforceability of liquidated damages clauses and contractual does not recognise the apportionment of contractual damages,
penalty clauses. The Act provides that such clauses are valid and considers that a contractor is entitled to monetary compensation if it
enforceable. A party may apply to court (under the Act) if the can show that the employer’s actions were a cause of the loss.
amount of the penalty is “out of proportion to the prejudice suffered
by the creditor”. The court may, if it considers that the penalty is 3.5 If the contractor has allowed in his programme a
disproportionate to the prejudice suffered, reduce the penalty as it period of time (known as the float) to allow for his own
considers equitable. delays but the employer uses up that period by, for
3 Common Issues on Construction after this float is used up?
Contracts
This will depend on the wording of the construction contract used by
the parties. The float is owned by the project in contracts which only
3.1 Is the employer entitled to vary the works to be done entitle the contractor to an extension of time which delays completion.
under the contract? Is there any limit on that right? This is also the case if the contract is silent on the issue of float. If
the contract provides that the contractor is entitled to an extension of
Whether or not, and to what extent, an employer is entitled to time if the float is used up at the request of or due to the fault of the
vary the works to be done under the contract will depend on the employer, or if the contractor’s progress is delayed by the employer
provisions of the contract. There are no limitations imposed from then the contractor may claim an extension of time whenever the
outside the contract (e.g. by statute) on an employer’s right to vary float is used up due to an act or omission of the employer.
works. Under the common law, an employer may not instruct a
variation which fundamentally changes the nature of the works – this 3.6 Is there a limit in time beyond which the parties to
would constitute a new contract. Whether a particular instruction a construction contract may no longer bring claims
constitutes a fundamental change to the nature of the works will be against each other? How long is that period and from
a question of fact. what date does time start to run?
In South African law, the Prescription Act, 68 of 1969, states that

omitted, can the employer do it himself or get a third claims (subject to certain exceptions) are not actionable unless
party to do it? brought within three years of the date on which the “debt” became
due and enforceable. The debt is due and enforceable on the date
on which a party is aware of all the facts which give rise to their
The right to vary is typically dealt with expressly in construction
cause of action (or ought reasonably to have become aware) and
contracts. The common law provides that an employer may not vary
they are able to issue proceedings to enforce the debt. The Act also
the contract to omit items of work with the intention of awarding
recognises impediments to a party’s ability to enforce a debt, which
that work to another contractor. If work is to be omitted on the
delay the running of prescription until the impediment is removed.
instruction of the employer, it must be a genuine omission – in the
sense that the employer has decided not to go on with that particular It is possible, by agreement, to vary the time period within which a
item of work. The parties may expressly agree that the employer claim may be brought – usually to shorten the period. Such “time
will be entitled to omit work and award it to another party – though bar” provisions, which are common in construction contracts, have
such a clause would be unusual. been held to be enforceable under South African law, provided that
they are not so onerous as to breach public policy.
South African courts have held that internal dispute resolution
mechanisms in construction contracts may delay the running of
prescription as the debt is “unenforceable” until the party has satisfied
the requirements of the internal dispute resolution mechanism.
Yes, South African law recognises implied terms (i.e. they flow from
express terms or are implied by operation of law) and tacit terms
(i.e. they are “read in” as being necessarily incorporated, e.g. based 3.7 Who normally bears the risk of unforeseen ground
on the conduct of the parties). Implied and tacit terms which would conditions?
contradict the express terms of the contract cannot be implied into
a contract. This is determined by the relevant contract; however, the default
position in law is that the contractor bears the risk for ground

conditions which were reasonably foreseeable. It is common in

construction contracts for the contractor to bear the risk for ground 3.13 Are parties which are not parties to the contract
conditions the “experienced contractor” ought to have foreseen. entitled to claim the benefit of any contract right
3.8 Who usually bears the risk of a change in law the original contracts in relation to defects in the
affecting the completion of the works? building?
South Africa
The contract will specify who bears the risk for a change of law A third party, which is not party to a contract, can only claim the
affecting completion. If the contract does not specifically deal benefit of a contract where that third party has accepted an express
with the issue, each party is responsible for and bears the risk of stipulation in the contract of benefit to the third party. Outside of
complying with its statutory obligations. It is an implied term of such a scenario, a party, which is not party to a contract, cannot
construction contracts that a contractor will adhere to the applicable claim any benefits thereunder. This is, however, often dealt with
building and safety regulations when completing the works. by concluding separate contracts (collateral warranties) which give
rights under the contract to “third parties”.

to the design and operation of the property? 3.14 Can one party (P1) to a construction contract which
An employer obtains ownership of intellectual property developed
by a designer or contractor in execution of a construction contract,
once it is paid for, unless otherwise determined by the contract.
When two parties are reciprocally indebted to one another, one debt
is automatically set off against the other. This can only occur where
3.10 Is the contractor ever entitled to suspend works? the parties both have liquidated claims – it is not possible for a party
to set off a debt they owe against a debt which will be owed to that
This is governed by the terms of the contract. Normally, a contractor party in the future.
is only entitled to suspend works where the employer has failed to
make payment in terms of the contract. Suspension by the contractor
outside of contractual provisions which grant such a right may result care to each other either in contract or under any
in the contractor being liable for breach of contract or delay. other legal doctrine?
3.11 On what grounds can a contract be terminated? Are Whether there is a contractual duty of care would depend on the
there any grounds which automatically or usually terms of the contract. Under the South African law of delict, a duty
entitle the innocent party to terminate the contract? of care not to cause harm to another exists in certain instances, but
Do those termination rights need to be set out each case will depend on the circumstances. In considering whether
expressly?
a duty of care exists, our courts have considered factors such as the
foreseeability of the harm and public policy.
A contract will typically set out the grounds on which a party
may terminate it, and any notice provisions in that regard. If not
regulated in the contract, a material breach of contract (including 3.16 Where the terms of a construction contract are
repudiation of the agreement) gives the innocent party the right to
terminate the contract. The offending party must usually be given
a reasonable period of time to remedy its breach before the contract
Yes. The “golden rule” of interpretation followed by South African
is terminated.
courts is to give the language in the document its grammatical and
ordinary meaning, unless doing so would result in some absurdity,
3.12 Is the concept of force majeure or frustration known repugnancy or inconsistency with the rest of the document. The
in your jurisdiction? What remedy does this give process of interpretation must be undertaken having regard to,
amongst other factors, the context in which the provision being
uneconomic is grounds for a claim for force majeure? interpreted is used, the purpose of the term or contract and the
factual matrix surrounding the agreement – the exercise is a unitary
exercise, i.e. all factors must be considered in context.
South African law recognises the concept of vis maior or supervening
impossibility, i.e. an event, not the fault of either party, which Our law also recognises specific subsidiary rules of interpretation,
absolutely prevents performance, which will then render the contract which are applied to assist the court in arriving at a determination,
partially or completely void/unenforceable. It is not possible under these include rules such as:
South African law to invoke supervening impossibility where a ■ the presumption against tautology or superfluity;
contract has become uneconomic. Notwithstanding the common ■ the presumption that a change in language denotes a change
law position, the force majeure principle is commonly incorporated in intention; and
into construction contracts. Force majeure provisions typically ■ the contra proferentem rule – which provides that if wording
excuse the parties from performing obligations affected by force in a contract is incurably ambiguous, the provision should be
majeure for the duration of force majeure. interpreted against the author of the contract (as they had the
ability to make the meaning plain).

arbitrator by the parties and set out which rules will apply. Often
3.17 Are there any terms in a construction contract which these are the Arbitration Foundation of Southern Africa (AFSA)
are unenforceable?
rules or the rules of the Association of Arbitrators (AoA).
Generally, under South African law, terms of a contract which are

either unlawful or contrary to public policy are unenforceable. So- 4.4 Where the contract provides for international
South Africa

called “agreements to agree” are also unenforceable.
of design and/or the contract is one for design only, Before December 2017, all arbitrations were governed by the
limits on the extent of his liability? In particular, does Arbitration Act, 1965. Foreign arbitral awards were enforced in
the designer have to give an absolute guarantee in accordance with the Recognition and Enforcement of Foreign
respect of his work? Arbitral Awards Act, 40 of 1977. The International Arbitration
Act, 15 of 2017, came into effect on 20 December 2017. The
A designer’s liability will depend on the terms of the contract in Act governs all international arbitrations and awards. The Act
question. It is an implied term of contracts with professionals that effectively adopts the UNCITRAL (United Nations Commission
professionals will exercise due care and skill in the performance of on International Trade Law) Model Law as the law applicable to
their obligations. Typically, where the designer is commissioned international arbitrations in South Africa.
by the employer, the designer will warrant that the design is “fit The Act provides that foreign arbitral awards must be enforced and
to build”, and will be liable if the design fails. Where a contractor courts must, on application, make foreign awards orders of court
commissions a designer within a “design and build” contract subject to the limited grounds for refusal in the Model Law. An
commissioned by an employer, the designer is only liable for award which is made an order of court would be enforceable in the
negligence, and the constructor is liable otherwise.
same manner as a judgment or order to the same effect.
Domestic arbitrations continue to be governed by the Arbitration
4 Dispute Resolution Act, 1965.
4.1 How are disputes generally resolved? 4.5 Where the contract provides for court proceedings
The default position is that disputes, unless settled between the
parties, are determined by a court with jurisdiction to hear the
dispute. However, alternative dispute resolution, such as arbitration, The South African courts recognise and enforce foreign judgments.
has become the favoured approach, particularly in construction The leading South African case in this regard is Jones v Krok 1995(1)
contracts. Recourse to arbitration is only possible if the parties have SA 677(A), where the court held that foreign judgments are not
agreed to it as the mandatory dispute resolution mechanism. This directly enforceable, but constitute a cause of action which will be
can be done in the construction contract (before any disputes arise) enforced by our courts, provided: (i) that the court which pronounced
or, less commonly, by agreement in writing after the dispute arises. the judgment had jurisdiction to entertain the case according to the
principles recognised by our law with reference to the jurisdiction
of foreign courts; (ii) that the judgment is final and conclusive in its
jurisdiction? If so, please describe the general effect and has not become superannuated; (iii) that the recognition
procedures. and enforcement of the judgment by our courts would not be contrary
to public policy; (iv) that the judgment was not obtained by fraudulent
Adjudication is adopted by agreement between the parties in South means; (v) that the judgment does not involve the enforcement of a
Africa and the nature of the adjudication is dictated by the terms of penal or revenue law of the foreign state; and (vi) that enforcement
the agreement. Adjudicators are independent and may be appointed of the judgment is not precluded by the provisions of the Protection
either by the parties or by a named authority and are paid by both of Business Act, 99 of 1978, as amended.
parties. The decision of the adjudication is normally immediately
binding and, depending on the terms of the agreement, the parties 4.6 Where a contract provides for court proceedings in
may challenge the decision through arbitration or litigation. Absent your jurisdiction, please outline the process adopted,
an express provision to the contrary in the contract, any party may any rights of appeal and a general assessment of
apply to court to have an adjudication award reviewed and/or set how long proceedings are likely to take to reduce: (a)
aside (though there are limited grounds for doing so). a decision by the court of first jurisdiction; and (b) a
The CIDB has issued a Procurement Practice Guide for adjudication
procedures, including the appointment by the parties of the
adjudicator, which may be used in any form of contract or subcontract. Court proceedings normally comprise either an action or an
Proposed regulations under the CIDB Act will, if enacted, provide application. An application is brought on affidavit, where there is
for mandatory adjudication in construction contracts. no (foreseeable) dispute of fact and can be brought urgently or in the
normal course. Depending on urgency, the court can make a ruling
either immediately or after sets of affidavits have been exchanged,
arbitration clauses? If so, please explain how followed by a hearing. Non-urgent applications normally take eight
arbitration works in your jurisdiction. to 12 months to be finalised, and another six to eight months if there
is an appeal.
Arbitration clauses are common in construction contracts in South Actions are initiated by the plaintiff, who issues a combined
Africa. One would usually provide for the appointment of an summons with particulars of claim, setting out the grounds of their

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

Norton Rose Fulbright South Africa Inc. Norton Rose Fulbright South Africa Inc.
15 Alice Lane 15 Alice Lane
Sandton Sandton
Johannesburg Johannesburg
South Africa South Africa
Tel: +27 11 685 8923 Tel: +27 11 685 8570

Fax: +27 11 301 3300 Fax: +27 11 301 3200
Email: daniel.mcconnell@nortonrosefulbright.com Email: emmanuel.tivana@nortonrosefulbright.com
URL: www.nortonrosefulbright.com URL: www.nortonrosefulbright.com
Daniel is a disputes and transactional construction lawyer based in Emmanuel is a disputes and transactional construction lawyer based
Johannesburg. He is experienced in complex construction litigation. in Johannesburg. He is also a qualified Quantity Surveyor. He
Daniel has particular expertise in projects subject to public-private previously worked for a number of medium to large South African
partnership (PPP) requirements. He was a leading member of the team construction companies as a Quantity Surveyor for seven years.
which advised Bombela Concession Company and Bombela Civils Since joining the legal fraternity five years ago, Emmanuel has gained
Joint Venture (CJV) in various disputes with the Gauteng Provincial experience in the preparation and negotiation of standard forms and
Government pertaining to the Gautrain Rapid Rail Link megaproject. bespoke contracts for construction projects, including JBCC, NEC,
He is also assisting parties under the REIPPP programme in disputes GCC and FIDIC. His practical knowledge and understanding of the
against Eskom and subcontractors. construction industry ensures that clients are afforded practical legal
solutions to problems.
Daniel also works with the transactional members of our construction
team, preparing and negotiating construction project agreements. Emmanuel is currently part of the team acting for Exxaro coal in a
In addition to his work on the South African REIPP programme and dispute with a state-owned electricity utility company. He was also
other renewable energy project transactions, he was part of the part of the transactional construction team that advised a client on a
team providing advice on a 600MW coal-fired power station to be 600MW coal power station in South Africa.
constructed under the SA baseload procurement programme.
The construction team at Norton Rose Fulbright is one of South Africa’s largest. We offer a comprehensive and commercially focused disputes
and transactional service to major developers, lenders, employers, contractors, insurers, engineering professionals, concessionaires and other
stakeholders in the construction and projects space. Our aim is to provide cutting-edge advice – from the planning stages of projects, through their
development, the negotiation of relevant contracts, ongoing risk advisory services, occupational health and safety compliance advice and, when
necessary, mediation, arbitration, litigation and other conflict resolution services.
We provide commercially astute advice in construction disputes across all recognised dispute resolution mechanisms. We draw on the substantial
resources and experience of the firm’s wider litigation and dispute resolution practice, which is one of the largest litigation practices in South Africa
and in Africa.
In the transactional space, the team offers a broad range of experience in high-profile and complex construction projects and is counsel to a number
of international clients. The team works closely with our project finance, corporate, environmental, health & safety and real estate teams in order to
offer a full-service solution to clients.

Chapter 27
Ukraine Aleksey Pukha
Aleksey Pukha and Partners Anna Gadiatska
Therefore, in Ukraine, so-called design and construction contracts

concluded by building employers with general contractors/
contractors are generally used, which lay a contracting organisation
1.1 What are the standard types of construction contract under the obligation to provide both a priority design of the building
in your jurisdiction? Do you have contracts which project, and for further construction of the project. At that, in the
place both design and construction obligations case of concluding a general contract, the general contractor has
upon contractors? If so, please describe the types of the right to involve subcontractors for the execution of certain
types of work, including the supply of products necessary for the
have any arrangement known as management construction.
contracting, with one main managing contractor Among the design-only contracts under the jurisdiction of Ukraine,
and with the construction work done by a series in addition to the construction contract for project and survey works,
it is also possible to conclude the following contracts:
contracts” as an abbreviation for construction and ■■ contract for the development and transfer of scientific and
engineering contracts.) technical products;
■■ contract for the development and analysis of project
The commercial construction sector is quite extensive, both in documentation;
Ukraine and throughout the world, and therefore, in the course ■■ contract for the execution of research works or development
of construction, business entities are engaged in a wide range of and engineering works;
economic activities regulated by contracts of different kinds. ■■ contract for the execution of works on planning the territory;
The Ukrainian legislation provides for different kinds of economic ■■ contract for the preparation of city-planning conditions and
contracts that can be concluded by economic entities in the course constraints on land plot development; and
of construction. In general, all construction works are carried out on ■■ contract for the search for architectural solution, etc.
the basis of suborder contracts.
Ukrainian legislation also provides for the existence of an
The main types of suborder contracts, defined by Ukrainian arrangement known as management contracting with one main
legislation, are as follows: managing contractor. This type of contract includes construction
1. a construction contract (capital construction contract); both the management contract or engineering contract, which is
prime contract and subcontract; concluded by the investor/employer with a consulting engineering
2. a construction contract for the execution of design and company, which carries out general management of the construction
research (survey) works; facility instead of the investor/employer and includes activities for
3. a construction contract for the execution of geological, the provision of engineering and technical services, among which
geodetic and other works necessary for capital construction; are preliminary feasibility studies and research, project expertise,
and development of construction financing programmes, organisation
4. a construction contract in the field of capital construction of preparing design documentation, holding competitions and
material and technical support. tenders, identifying and searching for contractors, concluding
Under the current legislation of Ukraine, business entities have construction contracts, coordination of all participants’ activities in
the right to conclude contracts containing elements of various the construction, as well as carrying out technical supervision over
contracts (mixed contracts). In this regard, in Ukraine in the the construction facility and offering consultations on economic,
field of construction, it is possible to conclude complex contracts financial or other issues.
between the customer and the contracting organisation to combine In addition to the listed types of contracts, the following types of
the provisions for the execution of various types of work as well contracts are also widely used in the field of construction:
as conclude several different contracts between the construction
■■ investment contracts;
employer and different contractors for each stage of the project
(type of work) (for instance, the employer may conclude a separate ■■ contracts for the acquisition of construction authorisation
contract for the design and survey work with one organisation, and documentation;
a separate construction contract with another organisation under ■■ contracts for the supply of materials and equipment necessary
which the contractor undertakes to build the object in accordance for the construction;
with the design documentation developed by the first organisation). ■■ contracts for the accomplishment of improvement works;

Aleksey Pukha and Partners Ukraine
■■ contracts for the implementation of innovation activities; ■■ warranty terms of the completed work quality (operation of the
■■ contracts for project documentation expertise; construction facility), and procedure for eliminating defects;
■■ contracts for the provision of services intended for the ■■ responsibility of the parties for violation of the contract terms;
acceptance of the completed facility in operation; ■■ the procedure for settling disputes; and
■■ contracts for the connection of engineering networks; and ■■ the procedure for amending the contract and its termination.
■■ contracts for construction design and technical supervision,
Contract form. The contract must be concluded in the form, which
Ukraine
etc.
is prescribed by law, and, accordingly, the contract is considered
concluded from the moment of this form’s submission.
The construction contract must be concluded in writing.
and intention to create legal relations), or any 1.3 In your jurisdiction please identify whether there is
specific requirements which need to be included in a a concept of what is known as a “letter of intent”, in
construction contract (e.g. provision for adjudication which an employer can give either a legally binding or
or any need for the contract to be evidenced in non-legally binding indication of willingness either to
writing)? enter into a contract later or to commit itself to meet
Yes, the legislation of Ukraine establishes general and special or not a full contract is ever concluded.
requirements necessary for concluding a legally binding contract.
The following are general requirements, compliance with which is The legislation of Ukraine provides for the possibility of concluding
necessary for the contract’s validity: a letter (protocol) of intent, but there is no clear definition as to the
procedure and conditions for its conclusion and execution.
1. Requirements for content.
In addition, according to Ukrainian legislation, it is possible to
2. Requirements for compliance with the form.
conclude a preliminary contract, under which the parties undertake
3. Requirements for the parties to the contract regarding their
to conclude a contract in the future (the main contract) within
legal standing and qualification, as discussed in question 1.5
a certain period and on the terms stipulated in the preliminary
of this chapter.
contract, which shall be concluded in writing. A party that evades
4. Free will of the party to the contract and the correspondence
the conclusion of the main contract must compensate the other party
to its inner will.
for damages caused by delay, or the other party has the right to
5. The contract should be aimed at real legal consequences demand the conclusion of such a contract through the courts.
arising from it.
In practice, however, the parties may conclude a protocol of intent
Contract content. The contract is deemed to be concluded if
for future cooperation, in which their desire to work together in the
the parties have in a proper manner reached an agreement on all
future will be documented, and the basic framework for cooperation
essential terms of the contract.
between the parties will be defined. However, unlike preliminary
In particular, the essential conditions of the construction contract contracts, if the protocol of intent does not contain the will of the
are: parties, providing it with the force of a preliminary contract, it does
■■ the names and details of the parties; not create any obligations for the parties.
■■ the place and date of the contract; In case of readiness to conduct joint activity that has been discussed
■■ the subject of the contract; in the protocol of intent, the parties will enter into a separate
contract, which will be legally binding for them and which will
■■ the contractual price;
clearly indicate the terms of cooperation.
■■ the terms of the beginning and end of works (construction of
the facility);
■■ rights and duties; which it would be commonplace or compulsory to
■■ the procedure for ensuring compliance with obligations under have in place when carrying out construction work?
the contract; For example, is there employer’s liability insurance
■■ conditions for the insurance of risks of accidental destruction injury, or is there a requirement for the contractor to
or damage to the construction facility; have contractors’ all-risk insurance?
■■ the procedure for the provision of the project documentation,
resources and services; The standard insurance contract concluded during the performance
■■ the procedure for attracting subcontractors; of construction work under the laws of Ukraine is the contract of
insurance of risks of accidental destruction of, or damage to, the
■■ requirements for organisation of work;
construction facility, and the contract of insurance of third-party
■■ the order of the resources quality control by the employer; liability. Contracts of life insurance and accident insurance may
■■ conditions for the implementation of construction design also be concluded. Other risks related to the construction may also
supervision and technical supervision over the execution of be insured upon a mutual agreement of the parties.
works; Until 2005, the legislation of Ukraine stipulated the contractor’s
■■ the sources and procedures for financing works (construction obligation to insure the construction facility or a complex of
of the facility); construction works. Today, the insurance of the construction facility
■■ the procedure for calculating the work performed; or a complex of works is still mandatory, but the legislation lacks
a clear provision related to the party that is responsible for the
■■ the procedure for the completed works acceptance (construction
insurance, leaving this issue to the discretion of the parties regarding
facility);
this obligation in the contract.

In addition, the Ministry of Regional Development and Construction These funds will be used to guarantee the fulfilment of the
of Ukraine has adopted Recommendations on insurance of risks in contractual obligations of the contractor within the period specified
construction, which are recommended for parties to a contract. in the contract; in practice this is usually during the execution of
work and its acceptance by the employer. However, there is also a
possibility to return part of these funds after the end of work, and
to construction contracts in terms of: (a) general the remainder after the end of the guarantee period of the quality of
requirements; (b) labour (i.e. the legal status of those work, or the entire amount immediately after the guarantee period
Ukraine
working on site as employees or as self-employed ends.

The law establishes general requirements for parties entering into performance, and/or company guarantees provided to
a construction contract. So, the contractor is required to obtain guarantee the performance of subsidiary companies?
a licence for the right to carry out certain types of construction Are there any restrictions on the nature of such bonds
works. The employer is required to obtain a permit to perform and guarantees?
construction work, obtain town-planning terms and restrictions
on the development of the land plot, conduct a hydrogeological The possibility of securing an obligation under a construction
survey, conduct an examination of design documentation for the contract by a bank guarantee or through another financial institution
construction, etc., in case of necessity, depending on the category of or insurance organisation (hereinafter – the guarantor) is established
consequences (compliance) of the construction facility. legislatively. The guarantor is liable to the creditor for the
Concerning the workforce, the contractor can fulfil its obligations performance of the obligations of the debtor and pays the creditor
for the construction of the facility under the contract, both with the a sum of money in accordance with the terms of the guarantee.
help of its own employees, working on the basis of an employment Requirements for the guarantee contract may be provided for in the
contract, and with the help of third parties – subcontractors – construction contract, including the guarantee amount.
according to the terms of the subcontracts concluded with them. Additionally, the legislation of Ukraine provides for the possibility
Requirements for working conditions, rating and remuneration of of using a guarantee to ensure the performance of the contractual
labour, duration of working hours and rest, labour protection and obligations of the contractor. In this case, if the contractor does not
safety, insurance, social benefits, guarantees and compensation are fulfil the obligations under the construction contract properly, the
established by the labour legislation of Ukraine, and each contractor guarantor is obliged to perform them by his own efforts.
must comply with them with respect to its employees. The contractor
is responsible for its employees in the course of construction. 1.8 Is it possible and/or usual for contractors to have
Requirements for taxation. When paying employees working on the retention of title rights in relation to goods and
basis of an employment contract, the contractor is obliged to pay a supplies used in the works? Is it permissible for
single contribution for compulsory state social insurance at a rate of
22% of the salary of each employee, and is obliged to withhold from materials supplied from the site?
the wages of each employee:
■■ personal income tax in the amount of 18% of wages; and It is codified by law that if the employer did not pay the set price
■■ military tax in the amount of 1.5% of wages. of work or other amount due to the contractor in connection with
the performance of the construction contract, the contractor has the
right to hold back the transfer of the completed works (construction
facility), as well as the equipment and the remainder of unused
released either in whole or in part when: (a) the works material and other property of the employer left with the contractor
are substantially complete; and/or (b) any agreed until the moment of full payment by the employer.

The law of Ukraine establishes that the fulfilment of obligations
under the construction contract can be ensured by:
■■ warranty; 2.1 Is it common for construction contracts to be
■■ bail; supervised on behalf of the employer by a third
■■ forfeit; or architect) have a duty to act impartially between
■■ pledge, including mortgage of the construction facility or other contractor and employer? Is that duty absolute or is
real estate; it only one which exists in certain situations? If so,
■■ withholding; please identify when the architect/engineer must act
impartially.
■■ deposit; and
■■ other types of collateral agreed by the parties. The implementation of construction design supervision and technical
Therefore, the employer is legally empowered to withhold part supervision during the construction of the facility is mandatory.
of the funds when making settlements with a contractor for the Technical supervision must be provided by the employer. It is quite
work performed. Usually, the amount of such retention is set at common that, during the execution of the construction contract, the
a percentage of the cost of the work performed. The parties in the employer delegates his authority to carry out technical supervision
construction contract determine the terms concerning the amount, and control to a third party, including to specialised organisations
the order of use and return of the retained funds to the contractor. or relevant specialists with qualification certificates, their role
being defined in the contract. Construction design supervision is

carried out by the architect, the manager of the construction facility exceed 10% of the price specified in the estimate and do not change
or the persons authorised by him in accordance with the contract the nature of the work determined in the contract.
concluded with the employer. However, if the cost of such additional works exceeds 10% of
In this case, acting on behalf of the employer, in the event of detecting the price determined in the estimate, the employer can only make
deviations from the design decisions made during the construction changes to the estimate with the consent of the contractor.
of the facility, and when the contractor refuses to eliminate them, the
person carrying out the construction design or technical supervision
Ukraine
must notify the employer. omitted, can the employer do it himself or get a third
In addition, to ensure compliance by both the developer and the party to do it?
contractor with respect to the construction of approved city-planning
and other design documentation, state architectural and construction The contractor is obliged to perform all the works specified in the
control and supervision is exercised by a specialised executive body, design estimate. However, the construction contract can establish
which acts impartially towards both the customer and the contractor. that some types of work can be omitted; in this case, the employer
can perform these works both by his own efforts and through
2.2 Are employers entitled to provide in the contract that another third party.
they will pay the contractor when they, the employer, So, for example, under the agreement of the general contractor,
have themselves been paid; i.e. can the employer the employer can conclude contracts with relevant specialised
include in the contract what is known as a “pay when enterprises for the performance of assembly and other special works.
paid” clause?
Ukrainian legislation does not provide for a “pay when paid” 3.3 Are there terms which will/can be implied into a
condition for the payment of a contractor’s services. Generally,
payment for work is made after transfer of the constructed facility
(works performed) to the employer if another procedure for General terms of construction contracts are determined in accordance
settlement is not provided for by an agreement between the parties; with the provisions of the Civil and Economic Codes of Ukraine and
for example, the contract may provide for advance payment for the the General Terms for Conclusion and Implementation of Contracts
work performed or payment for individual stages of work. in Capital Construction, approved by the Cabinet of Ministers of
Ukraine (hereinafter – the General Terms). The General Terms
establish the conditions that must be provided for in contracts for
2.3 Are the parties permitted to agree in advance a fixed capital construction and they are mandatory for accounting when
concluding construction contracts as listed in question 1.2 above.
particular breaches, e.g. liquidated damages for late In addition, the Ministry of Construction, Architecture, Housing, and
completion? If such arrangements are permitted, are Communal Services of Ukraine approved a Sample Construction
there any restrictions on what can be agreed? E.g. Contract for capital construction, which can be used by the parties
does the sum to be paid have to be a genuine pre- in construction as an advisory when drafting a construction contract.
financial loss suffered? 3.4 If the contractor is delayed by two events, one the
Yes, the parties have the right to stipulate in the construction his employer, is the contractor entitled to: (a) an
contract a provision which states the contractor either shall deposit
concurrent delay?
a fixed amount to a separate bank account of the employer, or to a
notary deposit, or conclude a bank guarantee contract for the same
If the delay in the facility and/or works transfer to the employer
amount as a security for the fulfilment of his obligations. In case
is due to the fault of the contractor, the contractor pays the forfeit
of defects in the constructed facility or if the contractor delayed the
established by the contract and reimburses the losses in full.
transfer of the facility to the employer, or in case of other breaches
of the contract, the employer is entitled to use this security amount If the delay occurred due to the fault of the employer (for example,
for sanctions and payment of compensation for losses caused by failure to provide the construction site to the contractor, failure
this failure or improper fulfilment of obligations. If, however, the to transfer the project documentation, violation of the financing
contractor has not committed such violations, and the construction terms, etc.), the contractor shall not be deemed to have violated
facility has been transferred to the employer, these funds will be the deadlines for the transfer of the completed works (construction
returned to the contractor. facility) shall bear no responsibility, and has the right to reimburse
the expenses caused by this violation.

Contracts period of time (known as the float) to allow for his own
3.1 Is the employer entitled to vary the works to be done entitled to an extension of time if he is then delayed
under the contract? Is there any limit on that right? after this float is used up?
Yes, according to the legislation of Ukraine, the employer has The Ukrainian legislation does not provide for the concept known
the right to make changes in the design estimate prior to the as the “float” when determining the time for performance of work
commencement of works or at the time of their performance, under the construction contract. The deadlines for the performance
provided that the additional works caused by such changes do not of works (construction of the facility) are established in the calendar

schedule, which is an integral part of the construction contract,

which determines the start and end dates of all types (stages) of 3.9 Who usually owns the intellectual property in relation
works provided for by the contract. to the design and operation of the property?
The employer has the right to make a decision on slowing, stopping

Generally, the manager of the construction facility, and/or the results
or accelerating the performance of the work by the contractor, but
of the work, and/or the project documentation, is the person who has
with the mandatory introduction of appropriate changes to the
created them (architect, contractor). The responsible manager also
contract on the timing of work.
Ukraine
has the personal non-property rights to intellectual property. Property

rights to intellectual property of the construction facility belong to
3.6 Is there a limit in time beyond which the parties to the manager/contractor who created the construction facility, jointly
a construction contract may no longer bring claims with the employer. However, the parties have the right to stipulate
in the contract a different procedure for the allocation of property
rights of intellectual property of the construction facility.
Yes, the claims of parties involved in construction contracts are In addition, it is stipulated that the use of the construction facility
subject to the general limitation period of three years. by the employer for implementation be allowed only once, unless
otherwise stipulated by the contract. Repeated use of such a project
The limitation of legal claims arising from improper quality of work
and the working documentation must be carried out exclusively
under contracts for capital construction is set from the day the work
with the manager’s consent and with the payment of a royalty to
is accepted by the employer and is:
him or his successors.
■■ one year – relative to the shortcomings of non-capital
constructions; and two years – in the event that the shortcomings
could not be detected in the usual manner of accepting work; 3.10 Is the contractor ever entitled to suspend works?
■■ three years – relative to the shortcomings of capital structures;

Yes, according to the current legislation, the contractor is entitled to
and 10 years – in the event that the shortcomings could not be
suspend work in the following cases:
detected in the usual manner of accepting work; and
■■ in case of non-receipt by the employer within a reasonable
■■ thirty years – relative to recovery of losses caused to the
employer by the illegal actions of the contractor, which led to period of time of a response to a notification of the need for
destruction or accidents. additional work with an appropriate increase in the design
estimate, which was not taken into account in the project
If the construction contract establishes a guarantee period and a documentation and which was found during construction; and
statement regarding the shortcomings of the work is made within
the guarantee period, the limitation period starts from the date of the ■■ in case of the employer’s breach of obligations under the
declaration of the shortcomings. contract, as a result of which the beginning or continuing of
work by the contractor is impossible or made significantly
complicated.
conditions?
The current legislation does not determine who carries the risk of
accidental destruction or damage to the construction facility, and Do those termination rights need to be set out
leaves this issue to the parties to be decided in the contract. expressly?
In practice, it is common for the risk of accidental loss or damage to
a construction facility before its acceptance by the employer to be The parties to the contract may provide for any conditions upon
borne by the contractor, except when such loss or damage happened the occurrence of which the contract may be terminated ahead of
due to circumstances due to the fault of the employer, and also from schedule by one of the parties. In any case, the contract may be
the moment of the acceptance of works by the employer (as codified terminated ahead of schedule by an agreement between the parties.
by law in 2005). In addition, certain conditions are established legislatively, under
An employer who has previously accepted separate stages of work which a party may initiate termination of the construction contract
carries the risk of their destruction or damage that is not the fault of even if the contract does not provide for the points mentioned below.
the contractor, even when the construction contract provides for the
The employer can withdraw from the construction contract:
performance of work when the risk is borne by the contractor.
■■ if the contractor did not start the work in a timely manner or
If the contractor provides material and technical support for the performs it so slowly that it is impossible to finish it within the
construction under the contract, then he will carry the risk of the time limit specified in the contract; and
impossibility to use the material(s) or equipment that has been ■■ at any time before the completion of the work (construction of
provided to him without a consequent reduction in the quality of the facility), by paying the contractor for the part of the work
work. performed, with compensation for damages caused by such a
withdrawal.
3.8 Who usually bears the risk of a change in law The contractor has the right to withdraw from the construction
affecting the completion of the works? contract:
■■ in case the employer makes changes to the design estimate
According to Ukrainian legislation, the risk of a change in legislation documentation that require the performance of additional
that will affect the implementation of the construction contract is works, the cost of which exceeds 10% of the contract price;
assigned to both parties. The parties have the right to provide for a ■■ in case of an impossibility to use the material (parts, structures)
different procedure of settlement in the contract. or equipment provided by the employer, without a reduction in
the quality of the work performed;

■■ when the use of material resources provided by the employer,

or compliance with his instructions regarding the performance 3.14 Can one party (P1) to a construction contract which
of works, threatens the life and health of people or leads to the owes money to the other (P2) set off against the sums
violation of environmental or sanitary rules, safety rules and due to P2 the sums P2 owes to P1? Are there any
other requirements established by law; and limits on the rights of set-off?
■■ in the event of the employer’s refusal to increase the contractual

cost of works due to a significant growth after the conclusion The possibility of giving credit to homogeneous claims with an
expired due date is provided for by Ukrainian legislation. The
Ukraine
of the contract of the cost of materials and equipment to be
provided by the contractor, as well as the services provided by possibility of the acceptance of such claims must be expressly
third parties. provided for in the contract, or it can be performed at the request of
one of the parties to the construction contract.
in your jurisdiction? What remedy does this give 3.15 Do parties to construction contracts owe a duty of
the injured party? Is it usual/possible to argue care to each other either in contract or under any
successfully that a contract which has become other legal doctrine?
The concept of “duty of care” is not explicitly codified in Ukrainian
Yes, the legislation of Ukraine provides for the concept of force legislation, but it indirectly finds expression in some norms that
majeure, which can be used in the implementation of construction govern the execution of a construction contract. In particular:
contracts. ■■ The contractor is obliged to take all measures to preserve the
It is provided that, in the event of destruction or damage to the property transferred to him by the employer, and is responsible
construction facility due to force majeure before the expiration of for loss or damage to this property.
the construction period specified in the contract, or in the event of ■■ The contractor has the right to conduct work economically, if
the impossibility to complete the construction for other reasons its quality is ensured.
beyond the control of the employer, the contractor will not have the ■■ The contractor, at its own expense, must eliminate shortcomings
right to demand from the employer payment for work or payment of work or material used for work which are the fault of the
for expenses. However, the parties are entitled to provide in the contractor.
contract a different procedure for resolving the consequences of ■■ The contractor is obliged to warn the employer in a timely
force majeure. manner of circumstances that have an important bearing on the
performance of the construction work.
Force majeure is not applicable to the claims of parties arising from
■■ The employer is obliged to assist the contractor in performing
the fact that the contract has become economically unfavourable;
the work in the amount and in the order established by the
therefore, the party cannot sue for this reason. construction contract, etc.
However, it is provided that, in the event of a significant change
in circumstances (if they have changed so much that if the parties
could have foreseen them, they would not have concluded a contract ambiguous, are there rules which will settle how that
or concluded it on other terms), by which the parties were guided in ambiguity is interpreted?
concluding the contract, the contract can be changed or terminated
by an agreement between the parties. If the terms of the construction contract are ambiguous, the parties
must present their interpretation according to the rules specified in
3.13 Are parties which are not parties to the contract the Civil Code of Ukraine.
entitled to claim the benefit of any contract right When interpreting the contents of a contract, words and concepts
that have equal meaning in the whole content of the contract
shall be taken into account, as well as the meaning of terms
building? (literally interpreted) which are generally accepted in the scope of
construction contracts. If a literal interpretation does not allow for
the clarification of the content of certain parts of the contract, the
Usually, third parties that are not parties to the contract are not
meaning shall be established by comparing the relevant part of the
entitled to claim from one of the parties to the contract if such a right
contract with the content of the other parts, the whole content, and
is not provided for in the contract. For example, if the employer
the intentions of the parties.
delegates his authority to perform technical supervision over the
construction to a specialised organisation designated as such in the Typical terms (standard form contracts), such as the Sample
construction contract, the specialist will have the right to lay a claim Construction Contract for capital construction, can also be taken
to the contractor for the elimination of identified deviations from into account in the interpretation.
the design plan or other construction shortcomings made during the If the parties do not reach a joint decision regarding the interpretation
construction of the facility. of these terms, the court may decide on the interpretation of the
If the authority of the third party to lay a claim to one of the parties to contract contents at the request of one or both parties.
the contract is not provided for in the construction contract, it shall
lay a claim to the party with which it has entered into a subcontract, 3.17 Are there any terms in a construction contract which
and then this latter party can lay a claim against the other party under are unenforceable?
the construction contract. For example, if the owner of the building
reveals shortcomings in the building, it has the right to lay its claim Certain conditions of the contract may be unenforceable by one
to the seller of the building (to the original owner – the employer), party if they correspond to the obligation of the other party to
and then the employer can lay a claim to the contractor regarding perform certain actions, without which the first party cannot begin
the quality of the work performed under the construction contract. to fulfil its obligations under the contract.

3.18 Where the construction contract involves an element 4.3 Do your construction contracts commonly have
of design and/or the contract is one for design only, arbitration clauses? If so, please explain how
are the designer’s obligations absolute or are there arbitration works in your jurisdiction.
Disputes arising from a certain part of construction contracts can be
transferred by an agreement between the parties for consideration
Ukraine
to the International Commercial Arbitration Court at the Ukrainian

When executing a design contract, the contractor must guarantee to
Chamber of Commerce and Industry (hereinafter referred to as
the employer that other persons do not have the right to obstruct or
the ICAC). In particular, the following may be transferred to the
restrict the performance of works based on the design and estimate
ICAC: disputes on foreign economic contracts, if the commercial
documentation prepared under the contract.
enterprise of one of the parties is located abroad; disputes between
The contractor bears absolute responsibility for project enterprises with foreign investments and international associations
shortcomings and defects in survey work, including shortcomings and organisations established on the territory of Ukraine; and/or
discovered later during construction, as well as in the process of the disputes with other organisations subject to Ukrainian law.
facility’s operation based on the completed design documentation
Another prerequisite, in the presence of which the dispute may be
and survey work. In case of identifying shortcomings in the design
referred to the ICAC, is the existence of an arbitration clause between
documentation or in the survey work, the contractor, at the request
the parties to transfer all or certain disputes that arise or may arise
of the employer, must redesign the project documentation free of
between the parties in connection with any specific legal relations.
charge or perform the necessary additional survey work and provide
compensation for the losses incurred. The proceedings are initiated after the submission of the claim to the
ICAC with the payment of a registration fee. The parties, at their
The contractor is subject to certain time limits; for example, filing
own discretion, may agree on the procedure for the consideration
a suit against the employer for compensation of damages caused by
of the case at the ICAC, the language and place of consideration,
project deficiencies can be made within 10 years, and if the losses to
the law to be applied, the composition of the court and the like.
the customer are caused by illegal actions of the contractor that led
In the absence of such agreement, the court shall review the case
to destruction, accidents or cave-ins – 30 years from the date of the
in compliance with the provisions of the Law of Ukraine “On
construction facility being accepted by the employer.
International Commercial Arbitration”, the Enactment of the ICAC
and the ICAC Rules.
4 Dispute Resolution The term of the case’s consideration must not exceed six months
from the date of the formation of the Arbitration Court. The ICAC
Presidium, if necessary, has the right to extend this term.
Generally, disputes arising from construction contracts are firstly 4.4 Where the contract provides for international
attempted for resolution through negotiations between the parties. arbitration, do your jurisdiction’s courts recognise
The party whose right has been violated has the right to appeal to advise of any obstacles to enforcement.
another party with a written claim, which is subject to review within
a month from the date of receipt by the other party. Yes, according to the current legislation, decisions made by
If an attempt at pre-trial settlement has not yielded any results, the international commercial arbitration, regardless of the country
party whose rights have been violated has the right to apply with the in which they were awarded, are recognised and implemented in
appropriate suit to the courts. Ukraine. If their recognition and enforcement are provided for
by an international contract, their binding nature is granted by the
4.2 Do you have adjudication processes in your Verkhovna Rada of Ukraine, or via the principle of reciprocity.
jurisdiction? If so, please describe the general In order to grant a permit to execute a decision made by international
procedures. commercial arbitration in Ukraine, the claimant must submit an
application to the Kyiv City Court of Appeal within three years from
There is no process similar to “adjudication” in the Ukrainian the date the decision was made by the international commercial
legislation; however, in addition to a lawsuit, the parties can refer arbitration if the debtor has a residence or location in the territory of
a dispute arising out of a construction contract to an order of writ Ukraine or if its property is in the territory of Ukraine.
proceedings or in a simplified lawsuit procedure and may use a Obstacles to the implementation of international commercial
dispute resolution procedure involving a judge before the case is arbitration decisions in Ukraine are the determination of a violation
reviewed on the merits. of the arbitral proceedings, a failure to comply with the arbitration
Certain restrictions (limitations on the dispute price, the grounds for agreement, or invalidity of such an agreement when the decision
occurrence, etc.) are established for the consideration of cases by has not yet become binding on the parties, or has been revoked or
way of a simplified lawsuit procedure or writ proceedings. suspended by the court of the country in which it was adopted, or
These processes are distinguished by their simplified procedure and it is found that the dispute could not be referred to international
limited timeframe, where the case is processed more quickly and commercial arbitration.
with a smaller amount of legal expenses in comparison with the full
process.
Additionally, a dispute that falls within the jurisdiction of the in a foreign country, will the judgment of that foreign
economic court may be referred by the parties to an arbitration court court be upheld and enforced in your jurisdiction?
(permanent or arbitral tribunal to resolve a particular dispute (ad hoc
courts)) or international commercial arbitration under an agreement Under the jurisdiction of Ukraine, the decisions of a foreign court
between the parties. are recognised and enforced in Ukraine if their recognition and

enforcement is provided for by an international contract, the binding Preparatory proceedings must be held within 60 days from the date of
nature of which is granted by the Verkhovna Rada of Ukraine, or via the proceedings’ commencement. In exceptional cases, this period
the principle of reciprocity. may be extended for not more than 30 days. The consideration of
In order to grant permission to execute a decision of a foreign court the case on the merits is carried out within 30 days from the date of
in Ukraine, the claimant must file a petition with the court at the starting the consideration of the case on the merits. Nevertheless, in
place of residence or location of the debtor or at the location of its practice, the parties may violate these terms.
property within three years from the date of the decision’s entry into In case of a disagreement with the decision of the first instance
Ukraine
force. court, the parties have the right to appeal within 20 days from the
date of its proclamation. An appeal against the decision of the first
instance court is considered within 60 days.
your jurisdiction, please outline the process adopted, In case of improper application of substantive law or violation of
any rights of appeal and a general assessment of procedural law by the courts of previous instances, the parties have
how long proceedings are likely to take to reduce: (a) the right to file a cassation appeal within 20 days of the date of its
a decision by the court of first jurisdiction; and (b) a proclamation. A cassation appeal against judicial decisions must be
considered within 60 days.
In addition, a decision of the economic court that has entered into
Disputes arising from construction contracts are subject to resolution
force can be reviewed on the grounds of newly discovered or
by economic courts under proper jurisdiction. The proceedings in
exceptional circumstances.
the court of first instance consist of the following stages:
■■ preparatory proceedings; and
■■ consideration of the case on the merits, which ends with a
decision.

Aleksey Pukha Anna Gadiatska

Aleksey Pukha and Partners Aleksey Pukha and Partners
21 John Paul II str., Office 416 21 John Paul II str., Office 416
Kiev, 01042 Kiev, 01042
Ukraine Ukraine
Tel: +380 44 528 30 94 Tel: +380 44 528 30 94

Ukraine
Fax: +380 44 528 30 54 Fax: +380 44 528 30 54

Email: office@puhaipartnery.com.ua Email: gadiatska@puhaipartnery.com.ua
URL: http://puhaipartnery.com.ua/en/ URL: http://puhaipartnery.com.ua/en/
Aleksey Pukha graduated from “Yaroslav Mudryi National Law Anna Gadiatska graduated from the Taras Shevchenko National
University” with a Master’s degree. Since 2009, he has been the University of Kyiv Law Faculty and received a Master’s degree in
managing partner of the law company Aleksey Pukha and Partners. “Jurisprudence and Legal Business Consulting”.
Today Aleksey Pukha and Partners Company is one of the leading Anna Gadiatska is a lawyer specialises in construction and engineering
Ukrainian law firms with worldwide business contacts. The Company law, the real estate purchasing market, pre-trial and trial settlement of
cooperates with clients from more than 100 countries worldwide. commercial disputes, support of international transactions, and case
management in the areas of taxation and reporting, investment and
Aleksey Pukha is the head of the Commission in the Ukrainian
customs law.
League of Industrialists and Entrepreneurs. He is also a member
of many professional legal organisations such as the Commission Anna Gadiatska has great experience in cases involving capital
in the International Chamber of Commerce, Court of Arbitration, the construction of commercial and residential buildings including
Ukrainian Bar Association, the Union of Lawyers of Ukraine, European contractual arrangement of a construction project, support of
Business Association and the Taxpayers Association of Ukraine. investment in construction, transaction management, obtaining
licences and permits required by Ukrainian law in construction.
He specialises in corporate, global finance, investment, international
trade, construction and engineering law, energy and natural resources, She is the author of numerous scientific publications concerning
government contracts, public law, alternative dispute resolution, and construction, engineering and real estate. Anna Gadiatska is also
public-private partnerships. a member of the Ukrainian and international professional legal
organisations.
Aleksey Pukha and Partners is one of the leading Ukrainian law firms, with worldwide business contacts.
The headquarters of the Company is located in Kyiv, in the heart of Ukrainian business.
Aleksey Pukha and Partners cooperates with USAID, the World Bank Group and IDLO within international research projects.
The Company follows high standards of legal services and has vast experience in a wide range of industries and legal practices including agriculture,
pharmaceuticals, real estate and construction, media and communication, insurance, intellectual property, banking and finance, capital market,
trade, energy and natural resources, automotive, the oil and gas industry, the hotel and restaurant industry, the metallurgical industry, the primary
industry, transport, the chemical and sport industries, and public-private partnerships.
Every day the Company provides legal services to international companies and individuals in Europe, North and South America, Asia, Australia and
North Africa. Annually, the Company contracts with clients worldwide and from all continents. The total volume of company transactions for 2017
amounted to more than USD 100 million.

Chapter 28
United Arab
Emirates
Hamdan Al Shamsi
Hamdan AlShamsi Lawyers & Legal Consultants Omar Kamel
and basics of creating a contract; namely, Article 125 defines the

general interpretation of a contract as: a contract is the meeting of
an offer issued by one of the contracting parties with the acceptance
1.1 What are the standard types of construction contract made by the other party and their concordance in such a manner
in your jurisdiction? Do you have contracts which as to produce the latter party’s effect on the object of the contract,
place both design and construction obligations which results in a binding obligation on each party in consideration
upon contractors? If so, please describe the types of of the obligation of the other party. A meeting of more than two
minds may agree to produce a legal effect. Article 126 states the
have any arrangement known as management object of a contract in a way that particularises the main subjects
contracting, with one main managing contractor of any contract and in paragraph (d) opens the door widely for
and with the construction work done by a series any other type of contracts. Article 126 states that the object of
of package contractors? (NB For ease of reference a contract may consist of: a) property, movable or immovable,
throughout the chapter, we refer to “construction corporeal or incorporeal; b) usufruct of the property; c) a specific
act or service; and d) any other thing that is not prohibited by law or
violating public policy or morals. Article 127 added more assurance
to what is stated in paragraph (d), mentioned above, by stating that:
Construction contract forms vary in different sectors and between
an offence or violation may not constitute the object of a contract.
contractors. Smaller and more personal construction contracts will
Additionally, Article 128 strictly limits any changes or modifications
generally be drafted by the engineer/consultant rather than lawyers,
to the regulation of contracts, as it states that nominate or innominate
and mid-size and large construction projects may generally apply a
contracts are governed by the rules contained in this law, and rules
FIDIC contract (with amendments to the standard FIDIC contract)
exclusively applicable to certain contracts are specified in the
or otherwise a specific, independent contract very similar to that of
special provisions regulating the same, whether in this law or any
FIDIC.
other. Article 129 lists the essential elements in an agreement;
There is a very small amount of design and build contracts used the necessary elements for the formation of a contract are: a) the
in the UAE. Design and build contracts can sometimes be found meeting of minds of the contracting parties on the main elements; b)
in development projects where the companies are relatively closely the object of the contract must be something possible, specified or
bound by many commercial arrangements or are affiliates or in specifiable, and negotiable; and c) the obligations arising out of the
the case of specialised contractors who perform special projects. contract must have a licit cause.
Design and build contracts generally follow FIDIC.
Article 874 (Civil Code) states that there must be a description of
Design-only contracts are generally handled by the project’s engineer
the subject matter, a statement of the type and extent thereof, the
and consultant. Management contracting in its strictest form does
manner of performance, the period over which it is to be performed,
not exist because the main contractor is always responsible towards
and the amount to be paid. A contract must not necessarily be in
the employer and the rights of subcontractors are limited; therefore,
it may be the case that the main contractor appoints subcontractors writing as per the Civil Code. Article 203(1) of the Civil Procedures
for the whole scope of works and it is practically not necessarily to Law, No. 11 of 1992 (the “Civil Procedures Law”) permits the
have employees. However, in most instances, the main contractors parties to record that any dispute between them concerning the
retain the civil and structural scope (unless it is specialised) and implementation of a specified contract may be referred to arbitration.
subcontract the other works in a project to subcontractors. The parties may also agree, by special conditions, to arbitration of
a particular dispute. A party will only be able to prove that it was
agreed that a dispute may be resolved by arbitration if it produces a
written arbitration agreement (Article 203(2)).
law jurisdictions, offer, acceptance, consideration As for tenders in construction projects, the usual practice in the UAE
and intention to create legal relations), or any is that the employer or engineer on his behalf will provide a Letter
of Award to the contractor whom is selected after the tender, which
any need for the contract to be evidenced in writing)? will confirm his appointment and create a contract. The general
practice thereafter is that the contractor and employer stamps and/or
Articles 125–129 and 199–206 of the UAE Civil Transactions Law, signs a full contract between one another.
No. 5 of 1985 (as amended), sets out the essential understandings

Hamdan AlShamsi Lawyers & Legal Consultants United Arab Emirates
retention money to be released at completion, and the balance upon

1.3 In your jurisdiction please identify whether there is expiry of the defects liability period.
United Arab Emirates
non-legally binding indication of willingness either to 1.7 Is it permissible/common for there to be performance
enter into a contract later or to commit itself to meet bonds (provided by banks and others) to guarantee
certain costs to be incurred by the contractor whether performance, and/or company guarantees provided to
or not a full contract is ever concluded. guarantee the performance of subsidiary companies?
This concept is known in the UAE, and is widely practised. and guarantees?
Generally in law, in order to be binding, the purpose and terms must
be unequivocal and the circumstances must leave no doubt that The use of performance bonds is very common and, when it comes
there is mutual consent with regard to the subject matter in question to joint ventures or special project vehicles, direct agreements and
(Article 132 (Civil Code)). corporate guarantees are common practice.
1.4 Are there any statutory or standard types of insurance 1.8 Is it possible and/or usual for contractors to have
which it would be commonplace or compulsory to retention of title rights in relation to goods and
have in place when carrying out construction work? supplies used in the works? Is it permissible for
For example, is there employer’s liability insurance contractors to claim that until they have been paid
for contractors in respect of death and personal they retain title and the right to remove goods and
injury, or is there a requirement for the contractor to materials supplied from the site?
It is possible for contractors to make use of a clause to retain
Neither the Civil Code nor any specific law prescribes any insurance ownership over the goods and supplies on-site and by contract
to be in place when carrying out construction works, but the parties they can insert clauses stating that the ownership of the goods shall
are free, subject to the law, to agree the content of their contract. remain theirs until full payment is made.
The most common forms of insurance under construction contracts
in the UAE are Construction All Risk (“CAR”) and Professional
Indemnity (if there are designs provided by contractor). The 2 Supervising Construction Contracts
contractor is responsible for any deaths that happen to its employees
on the site by law. With regard to health insurance for workers, the
Dubai Health Insurance Law No. 11 of 2013 is applicable and is supervised on behalf of the employer by a third
mandatory, and the law requires all nationals and residents with a party? Does any such third party (e.g. an engineer
Dubai visa to have health insurance cover. or architect) have a duty to act impartially between
1.5 Are there any statutory requirements in relation please identify when the architect/engineer must act
to construction contracts in terms of: (a) general impartially.
sub-contractors); (c) tax (payment of income tax of Supervision of construction contracts on behalf of employers is
employees); or (d) health and safety? common practice, but the law does not specifically regulate the
impartiality of engineers. The employer can sometimes also appoint
The general requirements (i.e. formation, etc.) applicable to a project manager, which is common for larger projects. The
commercial transactions, which include construction contracts, engineer/consultant is governed by rules within the municipality
are covered by the Civil Code. All labour relations between and the culture in the UAE that they act impartially and make
employers and employees are governed by Federal Law No. 8 of important assessments, one of which is the actual progress of works,
1980 on Regulation of Labour Relations (the “LRA”). Employers which ultimately decides the amount that the contractor can claim.
are required to provide adequate protective equipment and have The engineer/consultant is mentioned in contracts and is required
measures to protect employees against the dangers of accidents in to make decisions as to the progress of works and manage the
the workplace. The municipality is the main body that regulates relationship between the employer and the contractor in an impartial
health and safety on construction sites and can apply fines and manner.
suspend a contractor’s licence if the contractor is found to not have
the required health and safety measures required by the municipality.
Employees do not pay income tax in the UAE. they will pay the contractor when they, the employer,
paid” clause?
are substantially complete; and/or (b) any agreed This arrangement is not expressly prohibited by the law of the UAE
defects liability is complete? and the parties are free to include such provisions in construction
contracts, and they will be enforceable. The freedom to contract is
It is common practice in the UAE for employers to withhold recognised in Article 257 (Civil Code), but the provisions applicable
retention money. An amount equal to 10% of the contract price to contractual conditions will apply to these arrangements.
is commonly reserved for retention. The parties are at liberty to However, most pay-when-paid provisions are found in subcontracts
agree the terms which must be met prior to the retention money rather than with employers.
being released. In most instances, the usual practice is for half of the

contractor may be entitled to additional payment where it is proven

2.3 Are the parties permitted to agree in advance a fixed that a part of the delay is not concurrent.

particular breaches, e.g. liquidated damages for late 3.5 If the contractor has allowed in his programme a
completion? If such arrangements are permitted, are period of time (known as the float) to allow for his own
there any restrictions on what can be agreed? E.g. delays but the employer uses up that period by, for
does the sum to be paid have to be a genuine pre- example, a variation, is the contractor subsequently
estimate of loss, or can the contractor be bound to entitled to an extension of time if he is then delayed
pay a sum which is wholly unrelated to the amount of after this float is used up?
This issue is not specifically addressed by legislation. Unless there

Liquidated damages are enforceable in the UAE. According to is an express provision to the contrary in the contract, where there
Article 390(1) (Civil Code), the parties may agree the amount of is remaining float in the programme at the time of an employer risk
compensation in advance for a breach of contract. The contractor
event, it is anticipated that an extension of time will generally only
can find himself paying sums that are much larger than the actual loss
be granted to the extent that the employer’s delay is predicted to
suffered and, in such an event, and in accordance with civil law, he
reduce to below zero of the total float on the activity paths affected
may apply to the courts and the court may, on the application of either
by the employer’s delay.
party (i.e. the employer or the contractor), vary such agreement so as
to make the compensation equal to the loss (i.e. increase or decrease
the amount), and any agreement to the contrary will be void. 3.6 Is there a limit in time beyond which the parties to
3 Common Issues on Construction what date does time start to run?
Contracts
The general rule is that claims under a construction contract must
be brought forward or claimed within the time limit of seven years.
under the contract? Is there any limit on that right? In cases of structural defects (whether in the case of collapse of
the structure, or a defect threatening its stability), the contractor is
responsible for 10 years after handing over the works. The designer
Generally, the employer is given the right to vary the works – almost
is jointly liable with the contractor as above, unless he has not
all employers insert such a clause and construction contractors are
supervised construction, in which case he will remain liable for
more likely to have such a clause, allowing the employer to have
defects in the design.
the absolute power to make variations. In the absence of such a
provision, any variation would be accepted by the courts so long as
it does not create an unreasonable burden on the contractor. 3.7 Who normally bears the risk of unforeseen ground
conditions?

omitted, can the employer do it himself or get a third The consultant and contractor will be held jointly liable if the
party to do it? building or installations collapse (totally or partially), or if the
defect threatens the stability and safety of the building, whether as
Work may be omitted from the contract, but the exact circumstances a result of ground conditions, or if the employer consented to the
under which the employer may execute the works himself, or get erection of the defective buildings. The contractor and consultant
a third party to do so, are generally determined by the terms and will have appointed a soil testing company who may be found to be
conditions of the contract. If the contract is a lump sum contract, responsible too.
then in certain cases, even if works are omitted, they may be implied
under certain circumstances. 3.8 Who usually bears the risk of a change in law
construction contract? The employer generally bears the risk; a contractor can be relieved
from liability, in the absence of any agreements otherwise, if he can
Terms are not readily implied in contracts and if the wording of prove that the change in law resulted in a loss or delay from his
a contract is clear, an alternative interpretation may not be given part. However, the employer will usually bear this risk under FIDIC
to Article 265(1) (Civil Code). However, in the absence of clear contracts.
wording, an examination of the mutual intention of the parties,
the nature of the transaction, and the trust and confidence which
should exist between the parties in accordance with custom in such to the design and operation of the property?
transactions, will be made according to Article 265(2) (Civil Code).
The person who owns the intellectual property in relation to the

3.4 If the contractor is delayed by two events, one the design is the person who created the design; in most instances that
fault of the contractor and one the fault or risk of is the architect.
concurrent delay? 3.10 Is the contractor ever entitled to suspend works?
Generally, concurrency of delaying events will lead to an extension The contractor is entitled to suspend works in most construction
of time being awarded, but without additional payment. The contracts and in law (unless stated in a contract to the contrary). In

most instances, the contractor can suspend works for non-payment

or breach of contract by the employer. 3.15 Do parties to construction contracts owe a duty of

there any grounds which automatically or usually A prescribed level of duty of care may be made by contract and
can be enforced against the contractor. The law does not provide a
expressly? definite duty of care.
The parties do not need to detail the conditions for termination in a 3.16 Where the terms of a construction contract are
contract, as is the case in a common law jurisdiction, as the grounds ambiguous, are there rules which will settle how that
for termination are set out in the Civil Code. It is permissible to ambiguity is interpreted?
explicitly agree that a contract will be considered automatically
cancelled if a party fails to perform its obligations under the The Civil Code states that the basic principle in contracts is that the
contract. The Civil Code requires that, unless the parties have agreed parties must have reached an agreement regarding their obligations.
otherwise, notice of cancellation must be given. Furthermore, if one The Code goes on to state that the primary rule of interpretation
of the parties does not honour his contractual obligations, the other is that words should have their true meaning interpreted and a
party may, after giving notice to the defaulting party, require that word may not be construed figuratively unless it is impossible to
the contract be performed or cancelled. The judge may also order give it its direct meaning. The Civil Code states that there shall
specific performance, defer performance or order cancellation and be no scope for interpretation of clear words. The Civil Code also
payment of compensation in any case, if appropriate. states that if there is scope for an interpretative construction of the
contract, an enquiry shall be made into the mutual intentions of
the parties beyond the literal meaning of the words, and guidance
3.12 Is the concept of force majeure or frustration known may be sought in so doing from the nature of the transaction, and
the trust and confidence which should exist between the parties in
successfully that a contract which has become accordance with the custom current in such dealings.
Force majeure is an established concept in the UAE. If force are unenforceable?
majeure makes the performance of the contract impossible, the
corresponding obligation shall cease, and the contract shall be Any contractual condition which conflicts with a mandatory
automatically cancelled. The Civil Code also notes that, in the case provision in the law is unenforceable, such as provisions exempting
of partial impossibility, the part of the contract which has become the contractor or the designer from liability, or provisions limiting
impossible to perform shall be extinguished. It is not possible to such liability. Therefore, any term aiming to limit the liability of a
successfully argue that a contract which has become uneconomic party in a contract which is contrary to the provisions of the law is
to perform constitutes force majeure; however, such a circumstance unenforceable.
can allow for a judge to amend the performance that is required or
otherwise amend the amount of compensation for such performance.
3.13 Are parties which are not parties to the contract entitled are the designer’s obligations absolute or are there
to claim the benefit of any contract right which is made limits on the extent of his liability? In particular, does
for their benefit? E.g. is the second or subsequent the designer have to give an absolute guarantee in
owner of a building able to claim against the original respect of his work?
The contractor and the architect are jointly liable for any total or
Most commercial terms may not be enforced by the new owner partial destruction within 10 years of the buildings they have
unless third-party rights are specifically created in the contract. In constructed. If the architect did not supervise the construction of
respect of obligations created by law, some of these obligations the works, his liability will be limited to any defects in the plans for
against a contractor may be claimed by a new owner in the absence a period of 10 years.
of any assignment of the terms of a contract.
due to P2 the sums P2 owes to P1? Are there any 4.1 How are disputes generally resolved?
Disputes in the UAE are generally resolved through UAE-based
Set-off may be mandatory, occur by operation of law, by agreement arbitration centres for construction contracts or through the courts.
between the parties, or judicially by virtue of an order of the court.
For a mandatory set-off to apply (that is, by operation of law) each
of the parties must be in debt to the other, the obligations must
be of the same kind and description, must be equally due and of procedures.
equal strength or weakness, and the set-off must not prejudice third
parties, irrespective of the cause giving rise to the obligation.
Adjudication is not regulated by legislation in the UAE. It is not
an uncommon method of dispute resolution, but the parties may not
be able to enforce an adjudicator’s award through the courts. There

are instances where disputes are resolved by adjudication under the enforce arbitration awards if the award does not comply with the
auspices of the International Chamber of Commerce, or the Dispute UAE laws and requirements for an arbitration award to be enforced.
Adjudication Board as established under the FIDIC contracts. If the
agreement states that an adjudicator’s award, or that of the Dispute

Adjudication Board, is binding on the parties, then failure to comply in a foreign country, will the judgment of that foreign
with the award may be considered to be a breach of contract. court be upheld and enforced in your jurisdiction?
4.3 Do your construction contracts commonly have In general, the test to enforce foreign judgments is higher than that
arbitration clauses? If so, please explain how of enforcing foreign arbitral awards as there is no treaty, such as the
arbitration works in your jurisdiction. New York Convention, that governs this issue. The UAE may apply a
foreign award from a foreign court so long as there was no jurisdiction
Almost all construction contracts provide for arbitration as a dispute for the UAE to begin with; as an exception UAE law provides that the
resolution mechanism; arbitration clauses generally refer to rules of parties can opt to resolve their dispute in other courts.
a certain arbitration centre. The most popular arbitral institutions
are the International Chamber of Commerce (“ICC”), the Dubai
International Arbitration Centre (“DIAC”), the Dubai International your jurisdiction, please outline the process adopted,
Financial Centre – London Court of International Arbitration any rights of appeal and a general assessment of
(“DIFC-LCIA”), and the Abu Dhabi Commercial Conciliation and how long proceedings are likely to take to reduce: (a)
Arbitration Centre (“ADCCAC”). a decision by the court of first jurisdiction; and (b) a

arbitration, do your jurisdiction’s courts recognise The courts of the UAE are easily approachable and any party may
and enforce international arbitration awards? Please register any claim they wish. The first instance courts may take up
advise of any obstacles to enforcement. to one-and-a-half years to resolve a dispute and provide a judgment;
however, in very rare circumstances, they may take longer. A
The UAE acceded to the New York Convention in 2006 without decision by the first instance courts can be appealed and the appeal
reservation. The UAE courts enforce arbitration awards and in the courts may issue a decision in the same amount of time or less.
very unlikely event, the law offers certain protections and will not Therefore, appeal court decisions can again be appealed on points
of law to the court of cassation or the supreme courts.

Hamdan Al Shamsi Omar Kamel

Hamdan AlShamsi Lawyers & Hamdan AlShamsi Lawyers &
Legal Consultants Legal Consultants
Office 1611, 16th Floor Office 1611, 16th Floor

Al Manara Tower, Al Abraj Street Al Manara Tower, Al Abraj Street
Business Bay, Dubai Business Bay, Dubai
United Arab Emirates United Arab Emirates
Tel: +971 4 346 9262 Tel: +971 4 346 9262

Email: hamdan@alshamsilegal.com Email: OALSwadeh@alshamsilegal.com
URL: www.alshamsilegal.com URL: www.alshamsilegal.com
With nearly a decade of successful litigation experience across the Mr. Kamel has a Master’s degree in Commercial Law and has been
United Arab Emirates, Mr. Al Shamsi has built one of Dubai’s most a member of Jordanian Bar since 2001. He is an experienced
reputable and respected law practices. He is widely regarded as a top corporate counsel, possessing strong post-qualification experience in
litigator in the Dubai Courts, with extensive experience in corporate, commercial practices in MEA and is profoundly skilled in corporate
banking and finance and insurance law. Mr. Al Shamsi advises both and restructuring matters, investments, corporate actions, intragroup
local and international companies and governmental entities in cases transactions and service arrangements. Mr. Kamel also specialises in
involving complex litigation. He appears regularly before the Appeals general mergers and acquisitions, strategic transactions and corporate
Court and the Court of Cassation, as well as UAE’s Federal Supreme restructurings, draft documents incidental to formation and ongoing
Court. Mr. Al Shamsi has been described as being “…very thorough business operations of corporations, partnerships, and limited liability
and highly efficient – Hamdan faced each challenge with strategy, companies. He advises on corporate governance matters (including
professionalism and confidence which ultimately resulted in our resolutions, preparing board and committee meeting materials and
successful outcome”. It is no surprise that he has been awarded as agendas and maintaining corporate records), and has experience
one of the most influential young leaders in the Middle East and the in cross-border transactions, real estate and commercial finance
young achiever award, amongst many more. transactions covering licensure, development and supply agreements.
Hamdan AlShamsi Lawyers & Legal Consultants was established in 2011. It has since become a name synonymous with success and is well-
known in the legal circuit. The success of the law firm is due to its specialisation in advising on commercial issues, insurance, due diligence, family
law, intellectual property law, banking, companies law and other matters locally, and its dedication towards offering unparalleled, high-quality and
culturally sensitive legal services, while adhering to the highest standards of integrity and excellence.

Chapter 29
USA Douglas Stuart Oles
Oles, Morrison, Rinker & Baker LLP Alix K. Town
typically participate on a complex construction project, although

that balance can easily be lost when the forms are heavily modified
to favour the interests of a particular party.
1.1 What are the standard types of construction contract In the U.S., construction management contracting is typically
in your jurisdiction? Do you have contracts which handled by a construction manager. Some of them (“at risk”) also
hold direct agreements with trade contractors, while others (“not at
contract. Please also describe any forms of design- risk”) merely ask as advisors to an employer (usually referred to as
only contract common in your jurisdiction. Do you the “owner” in the U.S.).
contracts” as an abbreviation for construction and and intention to create legal relations), or any
engineering contracts.) specific requirements which need to be included in a
With its fifty (50) separate states, the United States offers a wide writing)?
variety of contract types. Before the 1980s, there was a general
preference for fixed-price design-bid-build contracts, based on an California, the most populous state and generally a common law
employer advertising a fully completed set of design documents. jurisdiction, and the state of Louisiana, a civil code state, have
Time-and-materials arrangements have also long been used, both developed civil codes that include many principles applicable
especially where it is difficult to estimate a fixed price or when to construction law. Purchase of equipment and other goods for
construction must begin before there is time to complete a design. incorporation into a construction project is typically governed by
In recent decades, however, statutory changes have facilitated a the Uniform Commercial Code (“UCC”), which also resembles
much increased use of design-build contracting and its variations a civil law approach. The UCC acts as a gap filler for contracts
such as engineer-procure-construct (EPC) contracting. The involving sales or security interests in goods when the applicable
evolving technologies used in construction have led to an increased contracts do not address specific issues such as implied warranties
use of design-build contracting in specialty trades. Although public- or remedies. Although the different states have statutes addressing
private partnerships (P3) and Integrated Project Delivery (IPD) have various specific aspects of construction contracting, most of their
had a relatively slow start in the United States, their use seems to
law applicable to construction is created through the common law
be gradually increasing. Nonetheless, many segments of the U.S.
system of reported cases. Where a state lacks applicable case law
construction industry remain largely unfamiliar with those project
on a particular subject, its courts often look to federal case law or to
delivery systems.
decisions in neighbouring states.
There is no standard form of construction agreement in the United
Under U.S. common law, a binding contract typically requires an
States. There are, however, some published forms that are generally
offer, acceptance, and consideration. Consideration can be very
respected and widely used. Federal construction projects are
minimal (including the mere exchange of reciprocal obligations).
generally governed by the Federal Acquisition Regulation (“FAR”),
Most requests for proposal are written as invitations for tenders, so
which is essentially a collection of individual clauses that are
that they do not constitute offers in themselves. Employers typically
combined into a single contract as applicable. On local government
treat the tenders as offers and try to reserve broad discretion in
projects and private construction, the General Conditions and other
deciding which one (if any) to accept.
forms published by the American Institute of Architects (“AIA”)
are probably the most widely used. Other well-known suites of The states have various requirements as to which kinds of contracts
contract forms are published by ConsensusDocs, the Engineers must be in writing to be valid (so-called “statutes of frauds”). Some
Joint Contract Documents Committee (EJCDC) and the Design terms can be implied from industry practice or from whatever a court
Build Institute of America (DBIA). These publishers all offer forms deems to be “reasonable”, but key terms such as scope and price
for design agreements, prime construction contracts, construction must usually be in writing. In close cases, courts will often find a
subcontracts, and other purposes. All of these forms make an effort valid contract whenever they perceive clear mutual intent to enter
to achieve a degree of balance between the various parties that into a binding agreement. Moreover, acceptance can be by allowing

Oles, Morrison, Rinker & Baker LLP USA
work to proceed even without a signed agreement. If the evidence Policies commonly include waivers of subrogation that prevent an
indicates that there was no “meeting of the minds” with regard to insurer from seeking indemnity from other parties on the project
essential contract terms, however, a binding contract is unlikely to where a loss occurs.
exist. There are various legal theories in which a party performs
work for another in good faith reliance on what it reasonably
understood as an offer to contract by another party (e.g., implied to construction contracts in terms of: (a) general
contract, quasi-contract, quantum meruit, and equitable estoppel). requirements; (b) labour (i.e. the legal status of those
USA

non-legally binding indication of willingness either to (a) Many aspects of the construction process are governed
enter into a contract later or to commit itself to meet by government statutes and regulations, and there is
certain costs to be incurred by the contractor whether considerable variation between those rules among the various
or not a full contract is ever concluded. states. Government contracts generally require so-called
“Miller Act” bonds, giving security for both payment and
performance. Contractors are also required to hold business
In the U.S., a court is likely to determine the enforceability of an
licences and construction licences in their particular fields.
agreement based on its substance rather than on its title. A letter of
Contractors on private projects typically have lien rights,
intent, however, may be unenforceable if it appears to be nothing giving them a security interest in the land on which they
more than an agreement to agree. If parties intend to have a binding construct improvements, and there are many regulations
agreement, it is more customary to record certain key terms in a governing use and improper release of hazardous substances.
“memorandum of understanding” or “memorandum of agreement”, (b) In the U.S., labour relations between workers and employers
and leave the details for later negotiation. It is not unusual for are primarily governed by federal statutes and regulations,
parties to enter into a preliminary agreement, contingent upon one creating substantial uniformity between the states.
party later being able to confirm that it can complete the desired Examples include Title VII of the Civil Rights Act, the Age
task within a specified cost range. It is also common, however, for Discrimination in Employment Act, the Immigration and
the employer to promise at least some level of compensation for Nationality Act of 1952, and the Americans with Disabilities
a contractor to perform under the initial preliminary agreement, Act. Minimum wage rates are established by the Wage Rates
especially if it requires substantial effort. Requirements (formerly Davis-Bacon Act) and other laws, as
are rules for paying premiums for overtime labour. Separate
Another commonly used technique is a limited notice to proceed, union agreements often govern the benefits that must be paid
allowing certain preliminary and/or long lead activities to begin to construction workers or to their labour unions.
while the parties continue negotiating to price the balance of the (c) In the U.S., most taxes are assessed either by the federal
planned project. government or by the individual states. State taxes vary
considerably. There is no federal sales tax or VAT, but
most states charge sales and excise taxes that apply to many
construction projects. The federal government charges
have in place when carrying out construction work? income tax on individuals, as do most state governments.
For example, is there employer’s liability insurance The federal government also charges a corporate income tax,
for contractors in respect of death and personal although it was substantially reduced in 2018. The federal
injury, or is there a requirement for the contractor to government also charges taxes to support Social Security
have contractors’ all-risk insurance? (retirement), Medicare (medical care for seniors), and
unemployment insurance. Municipal governments may add
their own sales taxes, property taxes and fuel taxes, and New
There is a considerable variety of insurance products and insurance York City has its own income tax.
approaches on U.S. projects. Projects typically require contractors
(d) Health and safety are heavily regulated, both at a federal and
to provide coverages for general liability and excess liability, which
state level. The federal Occupational Safety and Health Act
cover personal injury, death and property damage. Applicable laws (OSHA) and its implementing regulations are probably the
also typically require insurance for losses caused by automobiles best known. Individual states have their own occupational
and for worker’s compensation. It is also common to require safety laws, and the federal Jones Act has specific remedies
insurance against environmental pollution and coverage for for injuries occurring during work on a ship or barge.
completed operations. Employers often procure builder’s risk or
all-risk insurance covering damage to the project as it is constructed.
On some jobs, there is also insurance against breaches by lower tier
contractors (Subguard). released either in whole or in part when: (a) the works
To avoid the cost associated with multiple tiers of contractors are substantially complete; and/or (b) any agreed
procuring overlapping policies, it is common for projects to have defects liability is complete?
a single consolidated Contractor Controlled Insurance Program
(CCIP) or Owner Controlled Insurance Program (OCIP). U.S. employers are generally entitled to withhold a portion of a
Where a contract calls for architectural or engineering services, it contractor’s price as security for final completion of a construction
typically requires professional liability insurance. project. Such withholding must be authorised by contract, and it
is typically in the range of 5% to 10% of the contract price. Many
Policies vary in many details, including self-insured or deductible
contracts provide that the percentage of retention declines after
amounts, policy limits, and exclusions from coverage. Some level
the work is at least 50% complete, and it is often possible for the
of insurance is typically required as a legal condition of holding a
contractor to obtain release of the retention balance by posting a
contracting licence.
special bond as substitute security for the employer. It is not
common to allow retention after final completion, e.g., as security

for performance of post-completion warranty claims that have

not yet arisen. For specialty contractors performing early stages
of work (e.g., foundations, shoring, or ground improvement), it is
common to provide for release of their retention when their work is 2.1 Is it common for construction contracts to be
done, rather than holding back money until a much later date when supervised on behalf of the employer by a third
the rest of the project is completed. party? Does any such third party (e.g. an engineer
USA
1.7 Is it permissible/common for there to be performance it only one which exists in certain situations? If so,
bonds (provided by banks and others) to guarantee please identify when the architect/engineer must act
performance, and/or company guarantees provided to impartially.
There are relatively few owners on commercial projects who have
and guarantees?
sufficient in-house experience to manage a complex construction
project with their own personnel. Therefore, as noted in question
Performance bonds are commonly used in the United States, 1.1 above, many employers hire a construction manager who can
and most contractors have established relationships with surety provide that experience. Construction managers typically do not
companies so that they are prepared to provide bonding when owe any duty to act impartially between employer and contractor.
necessary. Banks are not typically involved in providing Traditionally, however, the construction manager role in the U.S.
performance bonds, and letters of credit are much less common as was often filled by a project architect or engineer. For example, the
project security than in many other countries. Where performance AIA contract forms long required that the employer’s architect would
bonds are required, U.S. employers also typically require posting adjudicate claims between the employer and contractor, and Rule 2.4
of payment bonds (like the “Miller Act” bonds on federal contracts of the National Council of Architectural Boards requires an architect
and the similar “little Miller Act” bonds on state contracts). Forms to act impartially when interpreting contract documents between the
of bonds are generally not prescribed by law, although some forms other parties. Many states have adopted some form of this rule in
(like the ones published by the AIA) are widely used and contracts their Codes of Professional Responsibility for architects, and a similar
often set specific requirements for the documents. Surety bonds on standard is included in the AIA form B101 design contract. Many
government projects may need to come from government-approved contractors nonetheless felt that architects and engineers tended to
sureties, and contracts often prescribe certain minimum “rating” favour the employers (who were paying for their services). In recent
levels for the issuer of bonds. years, architects and engineers have indicated increasing reluctance to
Parent company guarantees are used on many private projects and get involved in disputes between employers and contractors, leaving
on some public jobs. There is no consensus standard form for such that role to dispute review boards and other industry neutrals.
guarantees.
paid” clause?
materials supplied from the site? It is common to see clauses indicating that the employer’s prime
contract payments are a “condition precedent” for lower tiered
If a commercial contract is silent as to ownership of delivered contractors getting paid (“pay if paid”), and it is also common to
materials and equipment, the contractor’s ownership rights in those see clauses indicating that lower tier contractors should wait to
“goods” are likely to be governed by the Uniform Commercial get paid after the prime contractor is paid (“pay when paid”). The
Code. On most commercial projects, however, prime contracts enforceability of “pay if paid” clauses was challenged successfully
and subcontracts both provide that title passes upon installation (or in California on the theory that it conflicted with statutory lien
even at the time of being stored at the site). The normal rule is 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 not
that title passes no later than the time when a contractor receives
yet specifically addressed this issue, but it seems likely that a “pay if
payment for delivered goods, although the contractor often retains
paid” clause will not override a contractor’s statutory lien rights or
liability for protecting and insuring the goods until the employer
rights under prescribed payment bonds. This is because courts tend
takes beneficial occupancy of the project. If a contractor defaults
to sympathise with lower tier contractors who have no knowledge
on its obligations, the employer typically reserves a right to take the
or information about the employer’s ability to pay for the required
contractor’s materials and equipment as needed to complete the job.
work. In many instances, however, a subcontract can validly require
The contractor’s payment security is protected in other ways, such
the lower tier contractor at least to wait a reasonable time so that the
as statutory lien rights and/or payment bonds.
prime contractor can pursue payment from the employer before the
prime contractor is required to pay for the subcontracted services.
In federal contracts, FAR 52.232.27 generally requires prime
contractors to pass progress payments through to subcontractors
within seven days after receiving money from the Federal
Government. State governments generally have similar “prompt
payment” statutes for their own projects. In some states, there is also
a “stop payment” law, allowing an unpaid subcontractor to interrupt
employer payments to a prime contractor who is failing to pass
through money when required to do so.

mechanism used to price the adjustment. Variations normally have

2.3 Are the parties permitted to agree in advance a fixed to be exercised in good faith, and an employer may be constrained
sum (known as liquidated damages) which will be from luring contractors into submitting tenders on a broad scope of
work and later using deductive changes to remove only the easiest
completion? If such arrangements are permitted, are or most profitable portions of the scope. However, changes on
there any restrictions on what can be agreed? E.g. public projects are not required to be submitted for public notice,
does the sum to be paid have to be a genuine pre- and they generally cannot be used to argue that a different contractor
estimate of loss, or can the contractor be bound to should have been awarded the original contract. If a change is a
USA
pay a sum which is wholly unrelated to the amount of cardinal change, however, a third-party contractor may be able to
financial loss suffered? challenge the change and argue that the change itself should have
been submitted for competition, but the original contract will not
Liquidated damages are very widely used on U.S. projects to be disturbed.
determine the price that a contractor will pay for unexcused delays Most contracts provide that the parties should endeavour to price
in completing its work, especially where it will be difficult to variations by mutual agreement. Some contracts may specify
forecast the employer’s resulting financial damages. When likely formulas for pricing costs and mark-ups on variations, and some
delay costs are unusually high (e.g., from high revenue-producing may include unit pricing and/or equipment rates that can be used for
facilities like power plants and casinos), liquidated delay damages that purpose. Others may set forth that in the absence of agreement,
are also used to cap monetary liability for delay because it would additive variations will be priced on a time-and-materials basis.
be difficult to attract fixed price tenders without such assurances.
Many contracts provide that if work is deleted through a variation,
Employers will generally be unable to enforce liquidated damages
the contractor may not recover lost profit on the work that was not
that are held to be a penalty, i.e. that do not represent a reasonable
performed. In other cases, however, courts have held that where
forecast of fair compensation for anticipated delay-related costs.
some work is deleted, the contractor may be entitled to a higher mark-
The reasonableness of liquidated damages is typically determined
up on the undeleted scope in order to obtain equitable compensation
as of the time of contracting, rather than later when a breach
for its inability to spread learning curve and mobilisation costs over
occurs. Liquidated damages are sometimes invalidated when a
a larger volume of work.
contractor can show that the employer suffered no actual damage
due to a delay (e.g., damages assessed after the employer has taken
beneficial occupancy of the facility), and liquidated delay damages 3.2 Can work be omitted from the contract? If it is
are generally not chargeable if an employer has caused concurrent omitted, can the employer do it himself or get a third
delays during the time period at issue. party to do it?
Liquidated damages are also used to determine contractor liability

Where an item of work is unintentionally omitted from a contract
for other types of breaches. On power plants, for example,
(e.g., a “scope gap”), employers may typically add it by issuing a
liquidated damages are typically used to limit liability based on
variation as a change order (see question 3.1 above). Alternatively,
failure to achieve key performance guarantees such as heat rate and
the employer may generally perform the omitted work with its own
overall power output.
forces or with another prime contractor. Employers typically require
When an employer or prime contract agrees to liquidated damages in their agreements that each prime contractor must coordinate its
for delay or for some other breach, those damage rates typically work with other prime contractors (if any), and it is not uncommon
preclude a separate claim for “actual” damages arising from the for employers to supply some of the major equipment themselves
same breach. If liquidated damages are tied to specific milestones to avoid paying the usual mark-ups on having it supplied by a
(e.g., mechanical or substantial completion), the employer is contractor.
unlikely to have a right of claiming “actual” damages for failure to
achieve other milestones. Although liquidated damages are likely to
be the only monetary liability for the specified breach, however, they
typically do not preclude exercise of other non-monetary remedies
(e.g., directed acceleration and/or default termination).
In the U.S., every contract party owes an implied duty of good faith
and fair dealing. As a corollary to this duty, parties are typically
3 Common Issues on Construction held to owe an implied duty that they will not hinder or delay each
Contracts other.
An employer who provides plans and specifications for use in
construction impliedly warrants that they are suitable for use, and
3.1 Is the employer entitled to vary the works to be done employers are typically held responsible for errors and omissions in
their contract documents unless the contractor assumes responsibility
for reviewing and completing the design as a design-builder (and
Almost every construction contract contains language giving the even in that case the contractor may be able to place some degree of
employer a right to increase or decrease the contractor’s scope of reliance on the employer’s partial design and/or site information).
work by issuing a written variation, normally called a “change order”
Many courts have held that an employer owes an implied duty to
in the U.S. Where the parties cannot agree on such a variation,
disclose any “superior knowledge” about the site or the project that
employers often reserve a right to issue a unilateral directive to
a court finds should have been disclosed to the contractor.
achieve the variation. There are, however, normally some limits on
the exercise of this power. If it results in fundamentally changing When furnishing materials or equipment for a construction project,
the nature or scope of work, it may be treated as a “cardinal the seller typically owes implied duties that the goods will be of
change”, i.e. essentially a breach of contract by the employer. A “merchantable” quality and that they will be reasonably fit for
major deletion may also be treated as a partial termination for their intended purposes. See U.C.C. § 2-314, 315. Such implied
convenience rather than a deductive change, which may affect the warranties may, however, effectively be disclaimed by contract.

State statutes may provide that home builders owe an implied duty
that the resulting residences meet certain standards for “habitability”. 3.6 Is there a limit in time beyond which the parties to
In construction service agreements, contractors are generally held to against each other? How long is that period and from
an implied duty that they will perform in a “good and workmanlike” what date does time start to run?
manner. And in design contracts, architects and engineers may be
held to an implied obligation to perform to the “prevailing standard” State laws typically include a “statute of repose”, setting the number
established for similar services in the area where the work is done.
of years in which a construction-related claim must accrue (i.e. the
USA
In multi-prime contracts, employers may owe an implied duty to time in which they must generally be discovered). After a claim
coordinate their various prime contracts, and prime contractors has accrued, states have separate statutes of limitation that define
will probably be held to an implied duty to coordinate their various the number of years in which the discovered claim must be filed
subcontractors and suppliers. (in court or arbitration). Some states may also allow extended
Although the foregoing duties are likely to be implied by common periods in which favoured plaintiffs (e.g., residential condominium
law, it is also common for them to be stated expressly in a written purchasers and/or school districts) may assert claims without being
construction agreement. rejected as untimely.
Some construction contracts and agreements with insurers or
3.4 If the contractor is delayed by two events, one the sureties will specify shorter time limits for making claims than the
fault of the contractor and one the fault or risk of periods allowed under state statutes. It is common for construction
his employer, is the contractor entitled to: (a) an contracts to specify that contractor claims need to be asserted no
extension of time; or (b) the costs occasioned by that later than the receipt of final payment from the employer.
concurrent delay?
When contractors and employers cause concurrent delays, there are 3.7 Who normally bears the risk of unforeseen ground
conditions?
typically two general approaches used by courts and arbitrators. If
the delays are truly concurrent and cannot be segregated, the most
common approach is that neither party may recover monetary delay Most U.S. commercial construction contracts effectively transfer the
damages from the other party during the period when both of them risk of unforeseen subsurface conditions to the employer, assuming
were independently causing delay. In some cases, however, courts that the employer normally has more time and opportunity to study
and arbitrators will make an effort to apportion delay costs between the ground that will be excavated. This is typically handled by a
the two parties. Differing Site Conditions clause, of which the leading example is
In some cases, a party can show that it slowed parts of its work after the federal clause at FAR 52.236-2. A Differing Site Condition
realising that the job was already being delayed by the other party. clause typically allows compensation if a contractor encounters
A voluntary slow-down to accommodate another party’s delay is not latent site conditions that differ materially from those indicated in
properly a concurrent delay. the contract documents (“type 1”) or latent conditions of an unusual
nature that would not normally expected in the type of ground at
The issue is complicated when delays affect an activity with “float”
issue (“type 2”). Such clauses usually require the contractor to
on the critical path project schedule. If one party’s delay begins first,
give prompt written notice when encountering such conditions, and
it may cause no delay to the overall programme, which is impacted
both parties may owe a duty to mitigate resulting costs and delays.
only when the first party’s delay is exacerbated by the second party’s
Contractor rights to claim Differing Site Conditions may be limited
later delay. In that circumstance, a court may find that delay liability
if the contractor is paid to conduct its own pre-bid investigation
should be imposed only on the party who caused delay after the
of subsurface conditions or if a particular contractor has actual
affected activity moved onto the overall critical path of the job.
knowledge of the condition based on prior work at the site.

period of time (known as the float) to allow for his own 3.8 Who usually bears the risk of a change in law
delays but the employer uses up that period by, for affecting the completion of the works?
entitled to an extension of time if he is then delayed In the U.S., responsibility for unforeseen later changes in laws,
after this float is used up? regulations or building codes is often allocated by contract. The AIA
General Conditions (Form A-201) typically assign responsibility to
Some construction contracts attempt to prescribe which party “owns” the employer unless the contractor makes the situation worse by
the float time in the critical path programme. Some parties will also failing to comply with the changes when they have been made.
argue that they have no liability for delaying the other party unless Costs resulting from legal changes that are reasonably foreseeable
delays continue after using up all the float days in the affected activity. at the time of contract can probably be allocated by contract to a
As a practical matter, however, the consumption of float on multiple contractor. Where the changes were not foreseen, however, they are
non-critical activities can lead to “stacking” of labour and substantial more likely to be treated as excusable but non-compensable force
cost inefficiencies, even if the overall completion date of the project is majeure events.
not extended. There is no consistent national consensus on how float
time in a construction programme should be allocated.
If a contract is silent on this subject, courts will often conclude that
float days in a construction programme are owned by “the project”,
meaning that it may be used by whichever party needs it first.
Ownership of project intellectual property is increasingly specified
Once a contractor’s work is delayed to a point where it begins to by contract, and many contracts treat project-specific design as a
affect overall completion of the job, it is very likely that U.S. courts “work for hire” that belongs to the employer. Absent a contract
will treat such a delay as a basis for equitable compensation to the clause to the contrary, an architect probably has copyright protection
contractor.

for its plans, drawings and other design work product as stated in
the Architectural Works Copyright Protection Act of 1990. The 3.12 Is the concept of force majeure or frustration known
most common process in U.S. design contracts is that the designer in your jurisdiction? What remedy does this give
retains ownership but grants a royalty-free perpetual licence to the successfully that a contract which has become
employer and its successors for use on the project site. uneconomic is grounds for a claim for force majeure?
3.10 Is the contractor ever entitled to suspend works? The concept of force majeure is well known in U.S. construction
USA
contracting. Although some contracts allow compensation to

Construction contracts generally specify rights of the employer a contractor whose progress is interrupted by such unexpected
to suspend work for its own convenience, while saying little if events, most contracts merely allow an uncompensated extension
anything about a contractor’s right to suspend work. Contractor of time. Force majeure events are typically defined to include only
rights to suspend work are often limited to the situation in which an unforeseen events outside the control of both contract parties, and
employer or prime contractor is committing a default by failing to labour strikes may be excluded from this category if they arise
issue undisputed progress payments, and contractors must typically from specific acts or omissions of the affected contractor (i.e. to
give written notice and a reasonable opportunity to cure before be distinguished from national or regional strikes). The fact that a
suspending work. Subcontractor rights to suspend work due to a project becomes more difficult or costly due to rising costs of labour
prime contractor’s withholding of undisputed payments may also be or materials is generally not regarded as a force majeure condition,
guaranteed by a state “prompt payment” statute or lien law. Most although courts may regard sudden and extreme price escalations in
contracts also specify, however, that a genuinely disputed payment this category.
(e.g., compensation for a variation that has not yet been priced) In some limited cases, performance of a construction contract may
does not excuse a suspension of work by the contractor, who must also be excused (i.e. effectively allowing its termination) if the
continue working on unchanged work despite the pending dispute. contractor can show that the specified work was either impossible or
Other circumstances that may justify a contractor’s temporary commercially impracticable.
suspension of work may include an employer’s failure to provide
permits or site access, discovery of unforeseen hazardous materials 3.13 Are parties which are not parties to the contract
in the ground that impede progress, the employer’s failure to make entitled to claim the benefit of any contract right
key required decisions (e.g., approving submittals), encountering which is made for their benefit? E.g. is the second or
unexpected archaeological remains, or other unanticipated force subsequent owner of a building able to claim against
majeure events outside the contractor’s reasonable control. the original contracts in relation to defects in the
building?
3.11 On what grounds can a contract be terminated? Are Under U.S. common law, third parties may possess rights under
agreements between two other parties if such rights were clearly
Do those termination rights need to be set out intended. For example, a prime contractor may effectively
expressly? require a subcontractor to indemnify the employer for errors in
the subcontractor’s work. Warranties on special materials and
Rights of termination are typically specified by contract, although on installed equipment are often set up to flow directly from the
an employer’s right to terminate a defaulting contractor after manufacturer or supplier to the end-user employer. Lenders may
allowing reasonable opportunity to cure is supported by U.S. require subcontracts to be assignable to them if the prime contractor
common law. Underlying defaults may be of various kinds, such as defaults on its obligations. Residential developers generally require
failure to make required payments, failure to prosecute work, failing builders to make direct warranties to purchasers of new homes. It is
to correct defects, failing to provide required bonds or insurance, also common for agreements to provide that rights and obligations
failure to provide essential permits or site access, or a party’s filing in a prime contract to flow down to lower tier subcontractors and
for bankruptcy without reasonable assurance that the contract will suppliers. Absent an applicable contract provision, however,
be completed by the trustee in bankruptcy. An employer’s attempt U.S. courts may be reluctant to allow claims by third parties who
to fundamentally change the nature or scope of the job (e.g., a cannot show that they were the intended to benefit from promises in
“cardinal change” under federal law) may also justify a termination someone else’s contract.
of work by the contractor. Contracts often provide that warranties or other contractor
By contrast, an employer’s right to terminate all or part of a obligations are assignable if the employer transfers its rights and/
contractor’s scope for the employer’s convenience (i.e. without or obligations to a third party. Claims arising from defects in new
any default by the contractor) is not based on common law and construction may be limited to initial purchasers, and it cannot
will probably only be allowed when specified by contract. One be assumed that statutes of common law will transfer such claim
exception is contracts with the Federal Government. If a federal rights to any subsequent purchaser of the improved property. Most
contract fails to contain a termination for convenience clause, the construction contracts specify the circumstances in which the rights
court will read one into the contract on the basis of public policy. and obligations of either party may be assigned.
Contracts are also capable of being terminated if they are found to

be illegal or otherwise void (e.g., due to mutual mistake or some 3.14 Can one party (P1) to a construction contract which
other defect in forming the contract). owes money to the other (P2) set off against the sums
It is generally understood that a party’s payment obligations on

a particular contract may be set off against monetary obligations
owed by the payee under the same contract (e.g., progress payments

being withheld to pay costs of curing defective work). Absent any Many contracts seek to minimise ambiguities by establishing
applicable contract provision to the contract, U.S. common law may an “order of precedence” that can be applied if various contract
also allow a party to offset obligations to another party with sums documents are found to be inconsistent. Some contracts also require
owed by that other party on another separate project. Such set-offs the contractor to review the various documents and provide prompt
are only likely to be allowed, however, when the parties on both written notice if and when conflicts or ambiguities are discovered.
projects are the same (e.g., not merely joint ventures including other While some employers may write one-sided contracts that attempt
parties or mere common ownership of separate contractors). to transfer the risk of undiscovered ambiguities to the contractor,
Common law rights of set-off are often limited by contract if such clauses are likely to be challenged as violating the employer’s
USA
implied obligation to provide proper plans and specifications on
not by law. For example, contracts commonly provide that the
design-bid-build projects.
employer’s progress payments should be treated as a “trust fund”
in favour of persons providing labour or materials on the job, which
is inconsistent with the idea of diverting the funds to pay one of the 3.17 Are there any terms in a construction contract which
contractor’s obligations on another job. are unenforceable?
A prime contractor’s power to withhold money from a subcontractor
based on debts on another job may also be limited by the employer’s As discussed elsewhere in these answers, there are a variety of
contract or by language in an applicable “prompt payment” statute. terms that are unenforceable or void in construction contracts. The
unenforceability may result from a statute or from common law case
decisions. The invalid clauses will vary from one state to another.
Terms that tend not to be enforced include: a) requirements to
other legal doctrine? indemnify another party against its own fault; b) clauses requiring
waiver of fundamental rights guaranteed by constitutions or statutes;
c) pre-construction waivers of statutory lien rights; d) liquidated
With regard to supplying materials and equipment, the normal
delay damages set higher than the contractee’s reasonably anticipated
standard of care is that the goods must be free from defects. On
damages; e) damages precluding one party from recovering any
construction services, the prevailing standard is one of “good
damages for delays or breaches by the other party; f) “pay if paid”
workmanship”, i.e. something clearly less than perfection. On
clauses making a subcontractors payments absolutely conditional on
design contracts, the normal standard is defined as the prevailing
corresponding payments from the employer to the prime contractor;
level of care exercised by others providing comparable professional
and g) clauses that violate any other law or public policy.
services in the same location or industry segment. The employer’s
implied duty to provide plans and specifications free from defects is
generally regarded as a higher standard than a designer’s obligation 3.18 Where the construction contract involves an element
to meet the prevailing standard of care. of design and/or the contract is one for design only,
All U.S. jurisdictions have enacted worker compensation statutes limits on the extent of his liability? In particular, does
requiring that if a worker is injured or killed, that person’s employer the designer have to give an absolute guarantee in
must pay a specified level of compensation, regardless of fault. respect of his work?
That obligation is typically subject to insurance, which is typically
backed up by a contractual right of indemnity against all parties Although some design contracts attempt to impose a standard of
whose negligence or intentional fault contributed to the loss. defect-free design, most designers will insist on applying the common
Under the so-called “economic loss rule”, many states prohibit tort- law standard that claims of professional negligence require proof that
based claims for purely monetary damages against another party the defendant violated the prevailing standard of professional care
with whom the claimant has no contract. Applicable statutes and for comparable services. That prevailing standard clearly allows for
case law are likely to allow such tort-based damage claims, however, some level of error or imperfection, and cases alleging professional
negligence typically require evidence from a licensed professional
where the alleged wrongdoing also created personal injury, death, or
who can explain how prevailing standards apply to the facts. Design
physical property damage.
contracts often specify that the designer will correct errors in design
at its own cost, but designers will generally not agree to an unqualified
3.16 Where the terms of a construction contract are guarantee that their work is free of defects. Design contracts also
ambiguous, are there rules which will settle how that typically include an aggregate cap on monetary liability for breach of
ambiguity is interpreted? contract by the design professional.
Following the principle of contra proferentem, U.S. courts often

tend to construe ambiguous contract terms against the party who 4 Dispute Resolution
wrote them. Normally, an ambiguity only exists if it is reasonably
susceptible to at least two alternative meanings. Once a clause is
found to be ambiguous, most states will allow their courts to look at
evidence outside the written contract (“parol evidence”) to assist in
Under a Federal Government contract, disputes are ultimately
interpretation. For example, courts often look at the parties’ course
subject to resolution in a federal court or agency board, without a
of performance before a dispute arose, common understanding of
jury. Under state, local or private contracts, disputes are ultimately
certain terms in the construction industry, a desire to give meaning
subject to resolution in a court (most often with a right to jury)
to every term, and a desire to avoid interpretations that result in an
unless the parties have agreed otherwise. Although some federal
inequitable forfeiture by one party. Some states may also allow use
agency boards have significant experience in construction disputes,
of parole evidence to help clarify (but not flatly contradict) a written
most courts have little such experience, and parties often agree by
contract even if it does not immediately seem ambiguous on its face.
contract that disputes will be referred to mediation and ultimately to
binding arbitration.

Construction contracts frequently provide for multi-step alternative Arbitral awards are generally final and enforced in the U.S.,
dispute resolution procedures. Many contracts refer disputes to although statutes allow very limited appeals in extraordinary cases
high-level officers or executives of the parties before they may (e.g., arbitrators who fail to disclose conflicts, going beyond the
be submitted to a court or arbitration panel. Many large complex parties’ contractual submission to arbitration, obvious partiality, or
projects also establish a Disputes Review Board that helps to resolve fundamental denial of due process).
disputes before a project is completed. Non-binding mediation is
also very commonly used to resolve complex construction disputes.
A number of companies provide mediation and arbitration arbitration, do your jurisdiction’s courts recognise
USA
services. Two of the largest providers are the American Arbitration and enforce international arbitration awards? Please
Association (AAA) and JAMS, each of which publishes detailed advise of any obstacles to enforcement.
rules for mediation and arbitration when parties agree to utilise their
services. The United States is a signatory nation to the Convention on the
Although parties have a right to a civil jury in many construction Recognition and Enforcement of Foreign Arbitral Awards (the “New
disputes, the great majority of construction disputes are resolved York Convention”), and the U.S. complies with this agreement by
without the use of a jury. enforcing arbitral agreements and awards issued in international
arbitrations. Consistent with Article V of the New York Convention,
defences to enforcement of a foreign award include lack of due
4.2 Do you have adjudication processes in your process, a conclusion that enforcement would be contrary to public
policy, and other listed defences.
procedures.
Chapter 2 of the Federal Arbitration Act provides terms under which
The United States has not yet adopted “adjudication” of the kind courts of the United States shall enforce foreign arbitration awards
that is now widely used in the United Kingdom. On large complex in accordance with the New York Convention.
projects, however, it is fairly common for a contract to require
submission of disputes to a Dispute Review Board (“DRB”), 4.5 Where the contract provides for court proceedings
typically a panel of three individuals who have substantial in a foreign country, will the judgment of that foreign
construction industry experience. Although DRB recommendations court be upheld and enforced in your jurisdiction?
are typically subject to appeal, they resolve many issues and are
often given considerable deference. The United States has not signed any general agreement to enforce
As discussed in question 4.1 above, it is also common for foreign court judgments that would be equivalent to enforcement
construction contracts to refer disputes to binding arbitration by a of foreign arbitral awards under the New York Convention. The
single neutral arbitrator or by a panel of three arbitrators. Federal Arbitration Act also contains no general requirement that
U.S. courts must recognise a foreign court judgment. Several
states have nonetheless adopted the 2005 Uniform Foreign Money-
4.3 Do your construction contracts commonly have Judgments Recognition Act, which sets forth criteria under which
signatory states agree to enforce judgments from foreign courts. As
under the New York Convention, principal concerns are assuring
that the foreign proceeding allowed due process and that its ultimate
Many of the most widely used construction contract forms provide judgment does not violate U.S. public policy.
for mediation and ultimately for binding arbitration as a means
of resolving construction disputes. Arbitration is generally not Some individual states have their own bilateral agreements with
used, however, in resolving disputes under federal government other jurisdictions that facilitate enforcement of court judgments.
construction contracts. Where an unpaid contractor or supplier See the 1962 Uniform Foreign Money-Judgments Recognition Act
seeks to enforce security rights against real property (e.g., under and the 2005 Uniform Foreign-Country Money Recognition Act,
a statutory lien), that lien foreclosure action must generally be which have been adopted in 23 states and the District of Columbia.
prosecuted in a state court.
Arbitration is typically commenced when a claimant files a demand 4.6 Where a contract provides for court proceedings in
for arbitration with the administrative entity in charge of handling your jurisdiction, please outline the process adopted,
the arbitration. The respondent may answer in detail (and may serve
a counterclaim), and its failure to do so will generally be treated as a decision by the court of first jurisdiction; and (b) a
a denial of the claims asserted. Responding parties may also assert decision by the final court of appeal.
cross-claims against third parties who have consented to arbitration.
The arbitral administrator may assess filing fees based on the Federal courts typically allow jurisdiction only to limited categories
amounts being requested in the parties’ claims and counterclaims, of cases (e.g., claims for damages over $75,000 between parties
and parties will generally be required to deposit sufficient additional located in different states). State trial courts have broad jurisdiction
funds to cover the expected charges of the arbitrator(s). Unlike over parties doing business within their borders, and parties in such
international arbitration, domestic arbitrations in the U.S. often cases often are entitled to demand use of a jury.
allow at least a limited number of depositions, although pre-hearing
Court actions typically begin by filing a written “complaint”
discovery is often considerably more limited than what is allowed
identifying parties, key facts, and basic legal claims. Defendants
by the civil rules in a U.S. court.
are generally required to file a written “answer” to the complaint,
Some arbitration agreements adopt the same civil rules used in and the answer may also assert one or more counterclaims. A
courts, but greater cost efficiency can often be achieved by adopting responding party may also assert cross-claims against third parties
rules aimed at streamlining the exchange and presentation of the who are subject to the court’s jurisdiction.
parties’ evidence.

After the parties’ initial exchange of written positions, they are have much heavier schedules than others, and a long backlog can
typically required to exchange relevant documents and produce delay scheduling of a hearing. Larger cases with more witnesses
witnesses for oral examination (depositions). Parties are also and complex issues are likely to experience significantly longer
generally allowed to require opposing parties to answer a limited delays in getting a trial date. In most cases, however, a hearing
number of written questions (interrogatories). Many courts in the can be set between one and three years after a complaint is filed.
U.S. may impose some limits on this pre-hearing discovery, but Depending on the jurisdiction, it can then take several months or
allowable discovery is usually substantially more extensive than years to receive a decision.
would be allowed in an international arbitration or litigation. U.S. court rules allow for purely legal issues to be resolved prior to
USA
The delay between filing of a case and commencement of the hearing trial under what is called a summary judgment motion.
will vary significantly from one jurisdiction to another. Some courts

Douglas Stuart Oles Alix K. Town

Oles, Morrison, Rinker & Baker LLP Oles, Morrison, Rinker & Baker LLP
701 Pike Street 701 Pike Street
Suite 1700 Suite 1700
Seattle, WA 98101 Seattle, WA 98101
USA USA
Tel: +1 206 623 3427 Tel: +1 206 623 3427

USA
Email: oles@oles.com Email: town@oles.com

URL: www.oles.com URL: www.oles.com
Douglas Oles is an arbitrator, mediator and lawyer in private practice, With a focus on public procurement, Alix Town frequently represents
who has devoted more than 30 years to helping avoid and resolve owners, general contractors and subcontractors on a broad range
disputes on complex construction and supply contracts. He is a board of government and private contracts, including contract formation
member of the Global Engineering & Construction panel at JAMS and administration matters, government investigations, and contract
and a senior partner in Oles Morrison Rinker & Baker LLP (Seattle, claims and disputes.
Anchorage & Oakland). His activities include:
Ms. Town frequently writes for the federal government contracts blog,
■■ ABA Forum on Construction Law: national chair (2005–06). The Procurement Playbook. She is a member of the ABA Public
■■ American College of Construction Lawyers: national President. Contracts Law Section, Pacific Northwest Defence Alliance and a past
president of the National Contract Management Association, Portland-
■■ Best Lawyers in America: selected.
Vancouver Chapter.
■■ Canadian College of Construction Lawyers: Honorary Fellow.
Ms. Town received her undergraduate degree from Trinity College in
■■ Chartered Institute of Arbitrators: Fellow. Hartford, Connecticut and received her juris doctor from The George
■■ International Academy of Construction Lawyers: Fellow. Washington University Law School. She is currently enrolled at the
University of Nottingham, pursing an LL.M. in Public Procurement Law
■■ International Bar Association: Panel speaker at SEERIL
and Policy.
Conference (Berlin 2014) and IBA Annual Meetings (Vienna 2015
& Washington DC 2016 & Sydney 2017).
■■ Society of Construction Law: Program coordinator 2008 (London),
2010 (Hong Kong), 2012 (Melbourne), 2014 (Kuala Lumpur), and
2016 (São Paulo).
For many years, Mr. Oles has worked as a litigator and as a drafter
and negotiator of commercial contracts. His work includes energy
facilities, airports, major highways, bridges, foundations, hotels,
universities, hospitals, and numerous other projects. He also has
extensive experience with U.S. federal contracts.
Mr. Oles has written or contributed to numerous books and articles
on construction law. The most recent include: The Legal Maze of
the Keystone XL Pipeline (Int’l Constr. Law Rev. 2016); Construction
ADR (ABA 2014) (chapter on international Choice of Law and Venue);
and Construction Damages and Remedies, 2nd edition (ABA 2013)
(chapters on Theories of Recovery, Elements of Damages, and Proof
of Damages). Mr. Oles received his undergraduate degree (with
distinction) in history from Stanford University (Phi Beta Kappa). He
was Executive Editor of the Washington Law Review and received his
juris doctor (with honours) from the University of Washington.
Established in 1893, Oles Morrison Rinker & Baker LLP is one of the West Coast’s most experienced law firms with more than 30 attorneys practising
at offices located in Alaska, California and Washington. We have been providing legal counsel to public and private companies throughout the nation
and internationally in all phases of construction and government contracting since the 1930s. Our attorneys play integral roles in a wide range of
leading infrastructure projects, transportation systems and real estate developments. In addition to our primary practice areas of construction and
government contracts, our clients look to us for our legal counsel on commercial litigation, business and real estate. Our international work has
included a variety of transactional assignments in addition to a growing volume of dispute resolution assignments between international companies.

Chapter 30
Uruguay
PETIT Abogados José Luis Echevarría Petit
1 Making Construction Projects 1.3 In your jurisdiction please identify whether there is
1.1 What are the standard types of construction contract non-legally binding indication of willingness either to
in your jurisdiction? Do you have contracts which enter into a contract later or to commit itself to meet
place both design and construction obligations certain costs to be incurred by the contractor whether
upon contractors? If so, please describe the types of or not a full contract is ever concluded.
have any arrangement known as management Letters of Intent (LOIs) are common documents in Uruguay.
contracting, with one main managing contractor Letters of Intent can either contain actual obligations (binding
and with the construction work done by a series LOIs) or only willingness (non-binding LOIs). They are often
signed simultaneously with a non-disclosure agreement. There is
contracts” as an abbreviation for construction and no restriction as to the content of such letters under Uruguayan law.
Before the PPP law was passed in 2011, most contracts were turnkey which it would be commonplace or compulsory to
contracts, with the Contracting Party providing the design. This was have in place when carrying out construction work?
also the most common contract in public procurement. For example, is there employer’s liability insurance
Since then, Design-Build, Design-Finance-Build, Design-Finance- injury, or is there a requirement for the contractor to
Build-Operate and Design-Finance-Build-Operate-Maintain contracts have contractors all risk insurance?
have become more common. The contracts between special purpose
vehicles and construction companies in public-private partnership The only compulsory insurance set by law is labour accident
(PPP) projects are engineering, procurement and construction (EPC) insurance, which is under the monopoly of the State Insurance Bank,
contracts. PPP contracts are currently being used for the construction and is provided through social security payments. The construction
of penitentiaries, highways and schools. sector has a special regime for social security payments that are
Management contracting is currently used for big industrial projects, borne not by the Constructor, but by the owner of the land on which
such as the pulp plants of Montes del Plata and UPM. the construction is built.
Contractor’s all risk insurance is also common. Under the
1.2 Are there either any legally essential qualities Uruguayan Civil Code, the contractor carries the risk of destruction
needed either to create a legally binding contract of the works until preliminary acceptance by the employer, at which
(e.g. in common law jurisdictions, offer, acceptance, point the building is passed over to the owner.
consideration and intention to create legal relations), or
Civil liability insurance is requested in practically all construction
any specific requirements which need to be included in
a construction contract (e.g. provision for adjudication contracts.
or any need for the contract to be evidenced in writing)? Vehicle and machinery insurance is usually requested by the
Contracting Party under construction, EPC, build-operate-transfer
Under Uruguayan law, construction contracts can be oral (not and PPP contracts.
necessarily written), though important construction, concession, and
PPP contracts are usually written (both public and private). 1.5 Are there any statutory requirements in relation
Public procurement is ruled by laws compiled in the Texto Ordenado to construction contracts in terms of: (a) general
de Contabilidad y Adminisitración Financiera (“State Accounting requirements; (b) labour (i.e. the legal status of those
and Financial Administration Compilation”). working on site as employees or as self-employed
Notwithstanding exceptions set by law, State agencies have to employees); or (d) health and safety?
follow a public bid procedure or another competitive process set by
law for procurement. The award of a proposal, once notified, creates Under Uruguayan law, whatever the contract’s provisions, all
the contract, though unwritten contracts are usually formalised in construction contracts must respect the labour laws and safety and
writing afterwards. health rules that are mainly set forth by decrees of the Executive.

ECHEVARRÍA LEUNDA & ECHEVARRÍA PETIT Abogados Uruguay
A recent law passed by the Parliament (whose constitutionality is

discussed) states the criminal liability of employers when a breach 1.8 Is it possible and/or usual for contractors to have
of the safety rules endangers personnel. Criminal law academics retention of title rights in relation to goods and
argue that “danger crimes” are unacceptable, but in fact, when contractors to claim that until they have been paid
accidents happen, there is a risk of being held liable under this law. they retain title and the right to remove goods and
As stated above, social security rules regarding construction are materials supplied from the site?
different from those of other sectors. Social security payments
Uruguay
are the owner’s responsibility, not the construction company’s There is no right of retention of title. The contractor is entitled to
obligation. The construction company reports the number of days suspend the works when it is not paid, but has no right to retain the
worked by employees monthly, and the landlord pays the social goods that are incorporated into the works.
security charges. Certain contracts state that the price of the contract
includes social security payments. These agreements are binding
among the parties, but the Social Security Authority (BPS) may take
direct action against the owner, who is responsible. This said, these
agreements are not recommended for owners, because they are an 2.1 Is it common for construction contracts to be
incentive for under-declaration by the construction company, while suspended on behalf of the employer by a third party?
the final responsibility and liability falls to the owner. Does any such third party (e.g. an engineer or architect)
have a duty to act impartially between contractor and
This determines that, in many contracts in which social security employer? Is that duty absolute or is it only one which
payments are included, the owner has to pay close attention to the exists in certain situations? If so, please identify when
payments made by the contractor, and closely control the payroll, the architect/engineer must act impartially.
to prevent the contractor from neglecting in its declaration certain
employees or their working days. In most construction contracts, each party appoints an engineer to
Another very important law regarding construction contracts act on its behalf. It is common to see clauses that function as real
is outsourcing law. The law states that the prime contractor is powers of attorney for those engineers.
liable for labour and social security payments and accidents of its These engineers are not impartial, but rather act as representatives
subcontractors’ employees. This several liability of the contractor of each party.
and subcontractor can become subsidiary if the contractor proves
The Contracting Party’s engineer usually has the power to issue
that correct payment of salaries and social security charges have been
orders, and in most contracts, the engineer is entitled to issue
paid each month and accident insurance policies of subcontractors’
change orders that may modify the scope of work, the schedule, etc.,
personnel have been taken out.
obviously with compensation for additional work performed by the
contractor or damages caused by those orders to suspend.
1.6 Is the employer legally permitted to retain part of The lack of an impartial party determines the importance of stating
the purchase price for the works as a retention to be an alternative way to solve technical disputes among the parties.
Expert determination has shown to be time- and cost-effective.
defects liability is complete? Expert determination or dispute boards (ICC), can avoid arbitrations
and litigation with great results for both parties. This kind of
In most contracts, besides a performance bond of 5% to 10% of the technical alternative dispute resolution is possible under Uruguayan
contract price, there are retentions (5% of the amount invoiced for law and though not generally used, it is part of the author’s common
each advance certificate) in order to repair any defects detected at practice to include such clauses.
provisional transfer of a construction, which must be included in
the punch list. 2.2 Are employers entitled to provide in the contract that
Contracts usually state that, upon substantial completion, parties they will pay the contractor when they, the employer,
must issue a minute of Provisional Acceptance and, from that date, have themselves been paid; i.e. can the employer
there is a guarantee for a certain period, which differs according to paid” clause?
the type of construction. In that minute, a punch list of defects is
included, and they have to be solved within a reasonable period.
Under Uruguayan law, such a clause is viable as part of the freedom
Once the guarantee period expires, the parties issue a Definitive of will of the parties, which is a cardinal principle for contracts.
Acceptance Minute. With this Definitive Acceptance, the retention
This clause, though not common, is sometimes found in certain
is released to the contractor.
subcontracts in which payment delays by the owner are foreseeable;
but logically this has a cost.
performance, and/or company guarantees provided to 2.3 Are the parties permitted to agree in advance a fixed
guarantee the performance of subsidiary companies? sum (known as liquidated damages) which will be
Are there any restrictions on the nature of such bonds paid by the contractor to the employer in the event of
and guarantees? particular breaches, e.g. liquidated damages for late
The issuance of performance bonds is standard. They are usually does the sum to be paid have to be a genuine pre-
issued for 5% of the contract price. estimate of loss, or can the contractor be bound to
These are usually issued by the State Insurance Bank for most local
small to mid-size contracts, and in many contracts, a first demand
bank guarantee is needed. There is a wide range of options for
performance bonds both in public and private contracts. The Uruguayan Civil Code has clear provisions regarding breach of
obligations and the consequences thereof.

In case of breach of contract, the other party may either (i) terminate order rules that cannot be neglected by the parties in construction
the contract and claim damages (direct damages, loss of profit and contracts is a 10-year guarantee against defects by the Constructor
even moral damage), or (ii) demand its fulfilment (when possible) and the Architect.
and claim only the damages of the delay.
Additionally, the parties can set penalties and if nothing is said to the 3.4 If the contractor is delayed by two events, one the
contrary, they are deemed to be liquidated damages. If the parties fault of the contractor and one the fault or risk of
agree a penalty as liquidated damages, neither the judge nor the his employer, is the contractor entitled to: (a) an
Uruguay
arbitrator has the power to consider whether that amount in damages extension of time; or (b) the costs occasioned by that
reflects the actual damages suffered as a consequence of the breach. concurrent delay?
Notwithstanding the foregoing, there is a rule of proportion that

applies when nothing to the contrary is said in the contract. This The general rule is that each party is liable for its own faults or
proportion rule states that, when liquidated damages are agreed, the breaches. If there is no special clause in the contract, the contractor
amount of damages to be paid is proportional to the importance of should be granted an extension or an indemnity for the cost overruns
the breach. due to the delays caused by the fault or risk of the employer.
It is a common suggestion to clients to state that this proportional The contractor would not be entitled for an extension or indemnity
rule does not apply, so there is no decrease of incentive to accomplish for delays or cost overruns arising from its own cause or the
obligations as the contract is under execution. occurrence of a risk assumed. There is a general principle that states
that no party can make a claim based on its own guilt.
The contract may assign cost overrun or delay risks to a certain
3 Common Issues on Construction party, and the right to obtain an extension or an indemnity depends
Contracts on such clauses. Under Uruguayan law, a certain party can accept to
assume the risks of such delays or cost overruns. A party can even
hold the risk of force majeure or acts of God.
under the contract? Is there any limit on that right? That said, clauses under which one party assumes the other party’s
bad performance as a risk are scarcely seen, and the validity of such
In private contracts, any change of the contract shall be agreed a clause could be disputed, because such a claim would be based on
among the parties, with no exceptions, as long as there is no special the claimant’s own guilt.
clause allowing such change.
In public contracts, the public authority has the right to increase the 3.5 If the contractor has allowed in his programme a
scope of work by up to 20% or decrease it by up to 10% without period of time (known as the float) to allow for his own
needing the consent of the contractor. delays but the employer uses up that period by, for
In public procurement, parties can agree further increases, with a entitled to an extension of time if he is then delayed
cap of 100%. after this float is used up?
In private contracts, amendments can be agreed upon between the
parties with no limit. If such “float” is agreed in favour of the contractor, it cannot be
expended due to by delays caused by the other party.
3.2 Can work be omitted from the contract? If it is Therefore, a variation of the float agreement decided by the employer
omitted, can the employer do it himself or get a third that implies more time to perform the scope of the contract may
party to do it? entitle the contractor to ask for an extension and an indemnity if
there is no special clause to the contrary in the contract.
Article 1.291 of the Civil Code states that all contracts have to The employer has no right to use the float for variations or extensions
be accomplished by the parties in good faith, and therefore they of the scope of the contract.
are bound to what is specifically set forth, and also to what is
mandatorily required, in good faith. Therefore, if a contract sets
the scope in detail, and a certain mandatory aspect is omitted, the 3.6 Is there a limit in time beyond which the parties to
contractor has to accomplish that aspect in good faith.
This is not to say that the scope of work can be “stretched” in bad what date does time start to run?
faith by the Contracting Party.
Certain construction contracts involve different contractors; often The Civil Code states that the Architect and the Constructor are
there is a prime contractor and various subcontractors. In such liable if the construction is ruined totally or partially due to defects
cases, the scope of those different contracts shall be perfectly in the soil, design or materials within a 10-year period after reception
matched to avoid disputes. of the work. This is a public order rule that cannot be changed by
The omitted part of the contract can be performed by the Contracting agreement of the parties.
Party itself or any third party. If a contractor does not perform part A law passed in 1885, still valid today, states that the Constructor
of the scope of the contract, the Contracting Party has the right to is liable for other hidden defects (not those causing ruin that are
ask a third party to do it and charge the breaching party. covered by the Civil Code) which may appear in that 10-year period,
provided they were unnoticed at the time of reception, and that those
defects constitute more than “normal imperfections”.
construction contract? It is important to point out that when the defect appears within
that 10-year period, the employer is entitled to claim, and under
The general principle is freedom of the parties to agree. There are Uruguayan law, that right to claim does not expire until 20 years
very few “public order” law provisions. One of the very few public have passed.

the contract under article 1431 of the Civil Code. This is an implicit
3.7 Who normally bears the risk of unforeseen ground termination clause that is valid even against contract clauses.
conditions?
Force majeure and acts of God can determine termination due to
impossible performance. In this case, if no party assumed such risks,
Both the Architect and the Constructor bear the risk of ruin of the
the contract can be terminated with no responsibility of the parties.
construction due to ground conditions.
In public procurement contracts, the terms of reference usually state
Uruguay

that the bidder declares that it has inspected the site and knows
all the details, and therefore waives any claim of cost overrun or the injured party? Is it usual/possible to argue
overtime based on the ground conditions. successfully that a contract which has become
In these cases, the validity of this clause is arguable because it uneconomic is grounds for a claim for force majeure?
is absolutely clear that the bidder has no chance of performing a
thorough study of the soil before the contract is awarded. The party affected by force majeure is released from its obligation
There have been very important cases in which the Constructor was if performance of the contract becomes impossible, and is not liable
declared to be entitled to compensation for the cost overrun and or subject to penalties or damages, provided it has not assumed such
term extension, due to unforeseen conditions of the ground or even risk.
the seabed, despite contract clauses stating otherwise. It is highly difficult to successfully claim force majeure as a ground
According to the above, the rule is that when the Constructor or the for the contract becoming uneconomic because of the pacta sunt
Architect has the responsibility to determine if the construction is servanda principle rules in private law.
feasible on a certain area of soil, then they are liable for that decision. Such a claim could be successful in a public contract case if the
When a bidder receives from the administration technical Constructor invokes the rebus sic stantibus principle, which
information with mistakes, such administration is liable and has to is regularly accepted as a public law principle, but only when
compensate delays and cost overruns due to unforeseen features of such economic factor could not be foreseen and is not due to the
the soil not disclosed in the technical information. negligence or fault of the private party.
There have been many precedents in this sense in Uruguay.
3.8 Who usually bears the risk of a change in law which is made for their benefit? E.g. is the second or
affecting the completion of the works? subsequent owner of a building able to claim against
There is no written rule in this sense. In private contracts, the building?
consequences of a change of law should be negotiated between the
parties, unless otherwise provided. The general principle is that contractual clauses can only benefit the
In public contracts the solution is different. There is a principle parties to a contract.
stating that the economic and financial equilibrium shall remain This a disputed issue. The general principle has determined
unchanged during the performance of the contract (generally many judicial holdings against subsequent owners’ claims against
referred to as the “economic-financial equation” or ecuación Constructors and Architects, but the right of a subsequent owner
económico financiera in Spanish). to claim for defects within the 10-year period has been generally
If that equilibrium is broken by a change in law, then the contractor accepted.
has the right to submit a claim to rebalance it.
Economic rights from intellectual property depend on contractual

Set-off is automatic under Uruguayan law, provided both obligations
provisions.
are liquid and enforceable. Set-off is prevented if one obligation is
Moral rights always remain with the designer. subject to a term and the other is not. In many contracts, the owner
retains the right to set-off to cover penalties. This is quite unfair if
3.10 Is the contractor ever entitled to suspend works? there is no third party (arbitrator, judge) determining the penalty.
Only when the employer does not pay, and provided the cause is not 3.15 Do parties to construction contracts owe a duty of
a default of the same contractor. In some cases, lack of definition of care to each other either in contract or under any
the blueprints or failure of the Contracting Party to answer questions other legal doctrine?
on undefined aspects of the project may constitute a justified cause
to suspend works. Duty of care does not have to be set in the contract, as it constitutes
acting in good faith, with minimal diligence.
there any grounds which automatically/or usually 3.16 Where the terms of a construction contract are
entitle the innocent party to terminate the contract? Do ambiguous are there rules which will settle how that
those termination rights need to be set out expressly? ambiguity is interpreted?
Breach of contract by a party entitles the innocent party to terminate There are certain contract interpretation rules in the Civil Code.

The main criterion is to find the mutual intention of the parties. If access to fundamental evidence; decisions not claimed by parties
one party has drafted the contract, the ambiguous clause must be (ultra petita or extrapetita); or omission of deciding issues claimed
interpreted against that party. by the parties. In the first three cases, nullity is general, and in the
others, nullity only refers to invalid decisions.
are unenforceable? 4.3 Do your construction contracts commonly have
Uruguay
The general principle is for freedom of the parties, so only clauses arbitration works in your jurisdiction.
against public order rules are unenforceable (as noted in question
3.3). The arbitration clause must be set forth in the contract. When a
party wishes to start arbitration, an arbitration commitment must be
executed before a notary public, setting the issues to be decided,
the appointment of arbitrators and the procedure. If no procedure
are the designer’s obligations absolute or are there is agreed, the general procedure is applicable. Some arbitration
limits on the extent of his liability? In particular, does institutions have their own procedures.
the designer have to give an absolute guarantee in It can be based in law or in equity.

If the construction decays within 10 years or if there are important
arbitration do your jurisdiction’s courts recognise
hidden defects that appear within 10 years from construction, the and enforce international arbitration awards? Please
designer is liable. advise of any obstacles to enforcement.
4 Dispute Resolution Uruguay is a signatory of the New York Convention, so international

arbitration awards can be enforced in Uruguay.

Disputes are resolved by either a court resolution or arbitration. court be upheld and enforced in your jurisdiction?
4.2 Do you have adjudication processes in your Generally, foreign rulings can be enforced, following a certain
jurisdiction? If so, please describe the general procedure, as long as due process rules were followed in the foreign
procedures. ruling.
The right of the parties to choose foreign law and foreign courts for
Disputes arising from construction contracts can be solved by the contracts agreed and performed in Uruguay is often denied by the
parties amicably or decided by experts, arbitrators or judges. Uruguayan courts. However, a foreign arbitration tribunal or venue
The Uruguayan General Procedure Code has a general procedure, may be accepted.
in which a party files a claim in writing, including all documentary
evidence and enumerating all testimonies and third-party inquiries in 4.6 Where a contract provides for court proceedings in
its favour. The court then gives notice to the other party, who has 30 your jurisdiction, please outline the process adopted,
calendar days to answer the claim in writing with all the documents any rights of appeal and a general assessment of
and proof in its favour. There is an initial hearing in which parties how long proceedings are likely to take to reduce: (a)
can settle, and if not, the judge determines the discussed issues, the a decision by the court of first jurisdiction; and (b) a
evidence that will be considered and fixes a hearing for receiving decision by the final court of appeal.
testimonies from witnesses and experts. Once evidence is received,
both parties present in writing their conclusions on the findings The procedure starts with a written claim with all the available
(usually in writing but can be done orally) and the judge has 30 days documents, a written answer to the claim with all the available
to issue the holding. documents, a term for submission of other evidence (witnesses,
expert opinions and third-party inquiries) and a final ruling that can
The general Procedure Code has also rules on arbitration. The
be challenged before an appeal tribunal of three judges. If the first
Code gives freedom to the parties to set the procedure and decide
and second rulings differ and the amount is over a certain threshold,
whether the holding should be issued according to law or equity. If
the second ruling can be revised on certain limited grounds before
the parties do not agree on the procedure, the one described above
the Supreme Court of Justice.
is the default procedure.
Typically, first instance rulings can take from one-and-a-half to
Judicial holdings can be appealed before a tribunal of three judges,
two years, and the second instance from eight months to a year.
and exceptionally can end up at the Supreme Court of Justice when
Supreme Court appeals take about eight months. Arbitration takes
holdings of the first judge and the second tribunal differ and when
from one to one-and-a-half years but is final (can only be challenged
the amount of the suit is substantial.
on nullity grounds).
Arbitration decisions are not appealable and are only subject to a
These are estimated terms that may vary significantly depending on
nullity challenge on very specific grounds, including: decisions
the issues discussed and the nature and quantity of evidence, as well
issued out of term; lack of due process, or the tribunal is denied
as possible international aspects.

José Luis Echevarría Petit

PETIT Abogados
Andes 1365/901
CP 11.100, Montevideo
Uruguay
Uruguay
Tel: +598 2900 0400 / 2901 4010

Fax: +598 2902 2777
Email: jlep@echevarriaabogados.com
URL: www.echevarriaabogados.com
José Luis Echevarría Petit is the Managing Partner of Echevarría

Leunda & Echevarría Petit Abogados.
He is a Doctor in Law and Social Sciences (University of the Republic,
Uruguay, 1990) and holds a Master’s in Business Law (University of
Montevideo, Uruguay 1994) and a Master’s in Administrative Law
(University of Montevideo, 2014).
José Luis Echevarría Petit is an Arbitrator of the International
Arbitration Court of the Uruguay Chamber of Commerce.
He is the sole member of the Surveillance Committee of a 380
MM infrastructure bond managed by a subsidiary of CAF. He was
appointed an Academic of the National Academy of Economy in 2017.
He specialises and advises on Public-Private Partnerships,
Construction (roads, buildings, hospitals), Concessions (highways
and airports), and Renewable Energy, and is a consultant to the
Inter-American Development Bank on the financing of Public-Private
Partnership projects in Uruguay.
José Luis has vast experience in arbitration and litigation.
He is the Director of the Master in Administrative Law of the University
of Montevideo, and Professor of Administrative Contracts for the
Master’s in Administrative Law qualification at the University of
Montevideo.
He was engaged by the Government of Canada to conduct research
on PPP in Canada in 2002.
José Luis is author of various articles and co-author of several books
and has spoken at several conferences on Procurement and PPP in
the US, Mexico, Canada and Uruguay.
Echevarría Leunda & Echevarría Petit Abogados was founded in 1951.

The firm specialises in Corporate Law, M&A, Commercial Law, Administrative Law, Public Procurement and Infrastructure, Civil Law, Labour Law,
Customs and Foreign Trade, and Energy Law, and litigation and arbitration on these matters.
The members of the firm are: Dr. José Luis Echevarría Petit (Founder and Managing Partner); María Jesús Caulin (Senior Partner); Ignacio Alonso
Reybaud (Senior Partner); Florencia Sela Bonino (Junior Partner); and María Inés Echevarría Uriarte (Junior Associate).
Construction, PPP and Concessions practice includes roads and highways, public and private buildings, hospitals, and sports facilities.
All members have vast experience in Arbitration and Litigation.
Echevarría Leunda & Echevarría Petit Abogados provides comprehensive legal services to corporate clients from a wide range of sectors, both
advising and litigating. Partners develop and maintain strong professional and personal relationship with our clients.
For further information, please see www.echevarriaabogados.com.

Chapter 31
Zimbabwe Nikita Madya
Wintertons Legal Practitioners Farai Chigavazira
Contractual Penalties Act [Chapter 8:04] and Consumer Contracts

Act [Chapter 8:03], which impose consumer protectionism and
thereby limit the freedom to contract. Although the general law
1.1 What are the standard types of construction contract of contract is Roman-Dutch Law, parties are free to prescribe a
in your jurisdiction? Do you have contracts which law applicable to their agreement (lex loci) as well as the dispute
place both design and construction obligations resolution mechanism. For instance, parties can agree to resolution
upon contractors? If so, please describe the types of of disputes through arbitration proceedings to be held at a place of
contract. Please also describe any forms of design- arbitration in another jurisdiction under agreed arbitration rules.
contracting, with one main managing contractor 1.3 In your jurisdiction please identify whether there is
and with the construction work done by a series a concept of what is known as a “letter of intent”, in
of package contractors? (NB For ease of reference which an employer can give either a legally binding or
throughout the chapter, we refer to “construction non-legally binding indication of willingness either to
contracts” as an abbreviation for construction and enter into a contract later or to commit itself to meet
engineering contracts.) certain costs to be incurred by the contractor whether
There is no standard or prescribed contract and parties are free to
enter into a contract of their choice as long as it complies with the The concepts of “Letters of Intent”, “Expressions of Interest” and
basic common law requirements. However, in large construction “Memorandums of Understanding” are common in our jurisdiction.
projects, parties are increasingly adopting the Fédération Subject to agreement between the parties, these can be binding or
Internationale des Ingénieurs-Conseils (FIDIC) Forms of Contract. non-binding. Such arrangements can provide mechanisms for exit/
Contracts which place both design and construction obligations termination of rights and obligations subject to certain circumstances.
upon contractors are not uncommon and reliance is placed in this It is not uncommon for parties to provide for payment of costs
regard on the FIDIC Yellow Book. Design-only contracts are not incurred by the aggrieved party pursuant to the transaction in the
common. The arrangement known as management contracting, with event of the substantive contracts not being concluded for reasons
one main managing contractor and with the construction work done attributable to the other party.
by a series of package contractors, is very common in Zimbabwe.
1.2 Are there either any legally essential qualities needed which it would be commonplace or compulsory to
to create a legally binding contract (e.g. in common have in place when carrying out construction work?
law jurisdictions, offer, acceptance, consideration For example, is there employer’s liability insurance
and intention to create legal relations), or any for contractors in respect of death and personal
specific requirements which need to be included in a injury, or is there a requirement for the contractor to
construction contract (e.g. provision for adjudication have contractors’ all-risk insurance?
writing)? Yes. The construction industry normally requires all-risk insurance
(including third-party liability) due to the high incidence of accidents
The general concepts of offer and acceptance and the intention to in the construction sector. It is also common for professional
create binding legal relations (animus contrahendi) are essential consultants to obtain professional indemnity insurance. In large
requirements to any valid contract in our jurisdiction. Generally, construction projects which are funded by international institutions,
there is no requirement for contracts to be in written form. Verbal lenders have also started to request procurement of political risk
agreements are equally binding where the terms of same are clear insurance, and completion risk insurance. The contractors are
or easily ascertainable. However, parties are generally advised also required to procure insurance cover for the workers involved
to enter into written agreements, as it is easier to prove the terms in construction work under the National Social Security Authority
in the event of disputes arising. The parties’ freedom to agree (NSSA) Accident Prevention and Workers Compensation Scheme
on the contractual terms is subject to certain statutes such as the (Notice No. 68 of 1990).

Wintertons Legal Practitioners Zimbabwe
Typically, payments will be made by the employer to the contractor

1.5 Are there any statutory requirements in relation at intervals based on the production of progress certificates, which
to construction contracts in terms of: (a) general must state the amount payable. The contract normally provides
that a certain percentage of each of these payments stated in the
sub-contractors); (c) tax (payment of income tax of certificate be withheld as the retention money.
employees); or (d) health and safety? The exact amount of the retention money, and when the retention
Zimbabwe
money is payable, will depend on the terms of the contract.

There are no specific statutory requirements in respect of Where retention money is not provided for, performance guarantees
construction contracts. Generally, the law in Zimbabwe requires from the contractor and subcontractors are normally required.
every company involved in construction to comply with labour, tax, Sometimes both retention and performance bonds are agreed upon.
health and safety laws.
Generally, occupational health and safety laws that are applicable 1.7 Is it permissible/common for there to be performance
to all employers and employees across sectors are the Labour Act bonds (provided by banks and others) to guarantee
[Chapter 28.01] and the NSSA Accident Prevention and Workers performance, and/or company guarantees provided to
Compensation Scheme (Notice No. 68 of 1990). At a secondary guarantee the performance of subsidiary companies?
level there is the Protection from Smoking (Public Health (Control Are there any restrictions on the nature of such bonds
of Tobacco)) Regulations S.I.264 of 2002 that prohibit smoking and guarantees?
in enclosed public places including workplaces, and the Labour
Relations (HIV and AIDS) Regulations S.I.202 of 1998 which Performance bonds, insurance, bank and parent company guarantees
prohibit discrimination on the grounds of AIDS/HIV status, the are used extensively in construction projects. The nature of such
Pneumoconiosis Act [Chapter 15.08] and the Factories and Works bonds and guarantees is subject to agreement between employer and
Act [Chapter 14.08] and its regulations. contractor. There are no restrictions on the nature of such bonds or
Construction contractors are allowed to employ expatriate workers guarantees.
with specialised skills, subject to the granting of the relevant
work permits and residency permits by the relevant governmental 1.8 Is it possible and/or usual for contractors to have
authorities. Zimbabwe’s tax system is a residency-based, as retention of title rights in relation to goods and
opposed to a source-based, system. The contractor is obliged to supplies used in the works? Is it permissible for
deduct pay-as-you-earn (PAYE) tax from the salaries of all taxable contractors to claim that until they have been paid
employees and remit the same to the fiscal authorities.
All qualifying contractors are required to pay corporate taxes to
the fiscal authorities. A new business is required to be registered It is possible for contractors to have retention of title rights in relation
with the Zimbabwe Revenue Authority (ZIMRA) within 30 days to goods and supplies used in the works, depending on the terms of the
of incorporation. All companies must appoint a public officer of agreement regulating the relationship. In principle, it is permissible
the company within one month of the establishment of such office and normal for contractors to have retention of title rights in relation
or place of business. The public officer has to be approved by the to goods and supplies used in the works, and to remove goods and
Commissioner General and is answerable for all company tax matters. materials from the site if payment is not forthcoming.
Where a contractor is not registered for tax purposes, the employer However, it should be noted that our common law of property
is obliged to deduct withholding tax from any payment made to recognises the principle of accession. If the materials permanently
such contractor pursuant to the contract, and remit same to the fiscal accede to the structure and the land, they become part of the structure
authorities. and cannot be removed if such removal will cause damage to the
Under the Workers Compensation Scheme, the employer is liable structure. It is also not possible to contract out of the common-law
for any amounts due in respect of the workers contributions to the principles relating to accession.
scheme until such time as the contractor is assessed by NSSA. The Zimbabwean law also recognises a builder’s or contractor’s lien,
employer is entitled to recover any amounts paid to NSSA pursuant which operates by law and is a form of enrichment lien. The lien
to this. (ius retentionis or right of retention) entitles the holder thereof, in
this case the builder, to retain possession of the property until the
1.6 Is the employer legally permitted to retain part of expenses incurred by the builder in respect of the property which
the purchase price for the works as a retention to be are recoverable by the builder are paid to the builder. A lien is
released either in whole or in part when: (a) the works discharged after the claim is satisfied.
This normally depends on the provisions of the contract. In
practice, provision is normally made for retention money, which is
money that is withheld until the taking over of the works or the end
supervised on behalf of the employer by a third party?
of the defects liability period, whichever the parties agree to. It Does any such third party (e.g. an engineer or architect)
is not uncommon for parties to agree to the release of part of the have a duty to act impartially between contractor and
retention money upon the taking over of the works, with the balance employer? Is that duty absolute or is it only one which
being paid upon expiration of the agreed defects liability period. exists in certain situations? If so, please identify when
The retention money is based on a certain percentage (usually the architect/engineer must act impartially.
between 5% and 10%) of the amount payable by the employer to
the contractor. Yes, it is common for employers to engage project managers
to supervise their projects. Subject to agreement, third parties

may act as an employer’s representative, in which case they will The main requirement is that the penalty rate must be agreed by both
interface with the contractor, supervise compliance with the terms parties in the contract and should be in the frameworks prescribed
of the construction contract and take remedial action if necessary, in the law (min–max). However, if the intent of the party is to
and give instructions to the contractor on behalf of the employer. compensate the financial loss, the amount must be evidenced by facts.
Alternatively, the third party could play a limited advisory role
where it will monitor the contractor’s performance, report and make
Zimbabwe
recommendations to the employer who will engage the contractor
itself. The third-party project manager/supervisor must exercise its Contracts
duties professionally and, to the extent possible, impartially, in order
to ensure compliance with the terms of the contract and applicable
laws and by-laws. under the contract? Is there any limit on that right?
It should be noted that there are also regulatory requirements for
every construction site to be inspected/supervised by State/local Normally this is to be stipulated or addressed in the contract, which
government authorities (as part of the authorisation for construction ordinarily prescribes the nature and scope of the allowable variations
works). In supervising construction projects, the respective and the procedure to be adopted where a variation to the agreed
government authorities may suspend construction contracts where works is sought. If the contract does not provide for variations to
there is a breach of law, construction norms or regulations, and only the works, any variation of the scope of work may be performed
through a petition to the courts or using the courts’ administrative only on the basis of an additional agreement signed by both parties
means. However, in doing so, they will be acting on behalf of the in accordance with the contract’s non-variation clause. Variations
relevant local government authority or administrative institution. from design documentation require additional approval from State
Each local government authority has by-laws that regulate the authorities.
standards to be observed in carrying out the construction works.

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

contractor would normally not be entitled to recover cost in respect

of the concurrent delay. In all instances, however, regard must be 3.9 Who usually owns the intellectual property in relation
had to the facts, as there are cases where it is appropriate for the to the design and operation of the property?
costs to be shared.
It will depend on the provisions of the design agreement. Normally
the designer is the owner of the intellectual property and the
employer has rights of use.
Zimbabwe

example, a variation, is the contractor subsequently 3.10 Is the contractor ever entitled to suspend works?
Yes, the contractor is entitled to suspend works when the employer
fails to fulfil its obligations under the construction agreement, such
Such specifics must be addressed in the construction contract. The
as payment, failure to provide materials, equipment, or technical
schedule of works must be a part of the contract and every activity
documentation as may be applicable.
should be agreed upfront, including floats. Any such variations
initiated by the employer entitle the contractor to an extension of time.
3.6 Is there a limit in time beyond which the parties to entitle the innocent party to terminate the contract? Do
a construction contract may no longer bring claims those termination rights need to be set out expressly?
A contract is usually terminated through performance, novation,
release, delegation, settlement, set-off, merger, prescription,
As a general rule, the limitation period for prescription of a claim
supervening impossibility and on notice given by an aggrieved party
(usually debts) for disputes arising from contracts is three years.
in accordance with the relevant contractual provisions if the other
The prescription period starts to run from the date the cause of
party has committed a material breach of the contract.
action arises, that being the time from which the claimant became
aware of all the facts which are necessary to enable it to prove its In addition, the construction contract often provides for the
cause of action. Ordinarily, the limitation period starts upon final employer’s right to terminate the contract if there is a significant
acceptance of the works (taking over), even if the contract provides delay in the contractor’s execution of the works, or for defaults
for partial acceptances. However, if the contract provides for a listed in the contract.
warranty period longer than the prescription period then claims It is generally preferable to expressly set out the termination rights,
under such warranty can be made at any time during the subsistence and the consequences of such termination in the contract, although
of the warranty. failure to do so does not take away the aggrieved party’s termination
rights at law.
conditions? 3.12 Is the concept of force majeure or frustration known
Normally, construction is carried out on the basis of design the injured party? Is it usual/possible to argue
documentation. A geotechnical survey is required to be done
before the construction works begin. If such survey is provided
by the employer, the contractor acts on the basis of relied-upon
Yes, the use of force majeure clauses in commercial contracts,
information. Contractors are usually permitted to verify the
including construction contracts, is common practice in Zimbabwe.
information before a construction contract comes into effect. After
Force majeure circumstances provide full release from liabilities
it comes into effect, the contractor bears the responsibility for
under the commercial contract. Force majeure events may widely
unforeseen ground conditions save where the failure to foresee same
be defined as extraordinary, unpreventable and unforeseeable
was a consequence of the professional negligence of the persons
circumstances caused by a natural phenomenon (such as an
conducting the geotechnical survey. In any event, the obligations in
earthquake, landslide, hurricane, drought and others) or social and
the event of unforeseen ground conditions must be addressed in the
economic circumstances (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
3.8 Who usually bears the risk of a change in law perform their contractual obligations. The mere fact that a contract
affecting the completion of the works? has become uneconomic is not sufficient grounds for a claim for
force majeure. The parties are also free to agree on the events or
Since changes in law affecting contractual relations are regarded circumstances constituting force majeure.
as force majeure circumstances, both parties will bear the risk.
However, in big construction projects of national interest which are
funded by international institutions, the Project Company usually
enters into an Implementation Agreement pursuant to which the for their benefit? E.g. is the second or subsequent
Government undertakes to provide relief to the Project Company owner of a building able to claim against the original
where it is adversely affected by such changes in law. contracts in relation to defects in the building?
Contracts made for the benefit of a third party are binding if

accepted by a third party for whose benefit they were made. As a

general rule, during transfer of title to the property (building), the

new owner acquires rights and obligations related to such property. 3.18 Where the construction contract involves an element
In the circumstances, subsequent owners of a building may be able of design and/or the contract is one for design only,
to claim against the original contract in relation to defects in the limits on the extent of his liability? In particular, does
building only if such defects were revealed during the guarantee the designer have to give an absolute guarantee in
period provided by the original contract. respect of his work?
Zimbabwe
3.14 Can one party (P1) to a construction contract which The designer bears the risk for his design, but the extent of his
owes money to the other (P2) set off against the sums liability can be limited contractually. It must be borne in mind,
due to P2 the sums P2 owes to P1? Are there any however, that the liability of the designer to a third party cannot be
limits on the rights of set-off? excluded contractually and in the event of the designer being guilty
of a delict, such as negligence, and such delict causing damage to a
Set-off is recognised under common law in Zimbabwe. A debt third party, the designer will be liable to that third party.
qualifies for set-off if it is admitted or if it is capable of easy and
speedy proof. In other words, only liquidated debts may be set off.
Furthermore, set-off is only possible if the debts are both due and 4 Dispute Resolution
payable at law. The parties can regulate the question of whether set-
off should apply in their contract.
3.15 Do parties to construction contracts owe a duty of Disputes can be resolved either by approaching a court or through
care to each other either in contract or under any alternative dispute resolution, such as mediation, arbitration or
referral to an expert. Construction agreements typically contain
arbitration clauses in terms whereof parties will submit to arbitration
Parties to a construction contract generally owe a duty of care to in the event of a dispute.
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 4.2 Do you have adjudication processes in your
by law which will ground an action for damages in the suit of the
procedures.
person to whom the duty was owed and who has suffered harm
in consequence of the breach. A typical delictual claim will arise
The construction contract typically sets out the procedure that must
where a party has suffered damages as a result of the negligence or
be followed in the event of a dispute. If the contract provides for
other unlawful conduct of the other party. The parties are free to
arbitration, the disputes will be settled in terms of the relevant
limit the circumstances in which such liability may arise.
arbitration clause. Where there is no pre-agreed dispute resolution
procedure, disputes are resolved through the court system. The High
3.16 Where the terms of a construction contract are Court has original and inherent jurisdiction to hear and adjudicate
ambiguous, are there rules which will settle how that upon all civil disputes, although with low-value disputes it may be
economic to institute proceedings in the Magistrates Court.
The normal rule is that, when interpreting a contract, the language

used in the contract must be given its ordinary, grammatical meaning. 4.3 Do your construction contracts commonly have
If this creates ambiguity, our courts have developed various rules
setting out how contracts may be interpreted. The purpose of these
rules is to establish the true intention of the parties. The courts are
Construction contracts in Zimbabwe commonly have arbitration
guided, in construing contractual provisions, by judicial precedent.
clauses providing for referral of disputes to one or more arbitrators
Parties generally regulate what common rules should apply in the
appointed either by agreement between the parties or by some other
interpretation of the contract.
body such as the Commercial Arbitration Centre of Zimbabwe. The
procedure to be followed in arbitration proceedings is stipulated in
3.17 Are there any terms in a construction contract which the Arbitration Act [Chapter 7:15].
are unenforceable?

A construction contract, like any commercial contract, records the
terms agreed to by the parties, who are at liberty to agree on any and enforce international arbitration awards? Please
terms and conditions which are not prohibited by law and which advise of any obstacles to enforcement.
do not offend public policy. Generally, construction contracts are
unenforceable if they are against any applicable laws or are against Yes. Zimbabwe ratified the Washington Convention on the
public policy and morality (contra bonos mores). Settlement of Investment Disputes between States and Nationals of
Other States which was incorporated into Zimbabwean Law by the
Arbitration (International Investment Disputes) Act [Chapter 7:03].
The Convention on the Recognition and Enforcement of Foreign
Arbitral Awards requires courts of contracting states to give effect
to private agreements to arbitrate and to recognise and enforce
arbitration awards made in the contracting countries. In terms of
Article 3 of the Convention, each contracting state shall recognise

arbitral awards as binding and enforce them in accordance with the the basis of which fresh proceedings may be initiated in courts in
rules of procedure of the territory where the award is relied upon. Zimbabwe.
Under the Convention, an arbitration award issued in any contracting
state can generally be freely enforced in any other contracting state 4.6 Where a contract provides for court proceedings in
(save that some contracting states may elect to enforce only awards your jurisdiction, please outline the process adopted,
from other contracting states – the “reciprocity” reservation). any rights of appeal and a general assessment of
Zimbabwe

Additionally, Zimbabwe adopted (with amendments) the Model
Law on International Commercial Arbitration adopted by the decision by the final court of appeal.
United Nations Commission on International Trade Law on 21
June 1985, to give effect to the Convention on the Recognition and
Where there are no factual disputes, a party can approach the court
Enforcement of Foreign Arbitral Awards adopted in New York on 10
by way of a Court Application instituted by way of notice of motion
June 1958. Awards from international arbitration proceedings are
accompanied by supporting affidavits. If, however, there is a factual
recognised and enforced in Zimbabwe subject to compliance with
dispute, the correct procedure to follow is to approach the court by
the procedures in the Model Law.
way of action, which is instituted by summons. Ordinary actions or
Apart from the above, the Civil Matters (Mutual Assistance) applications are usually resolved by the court of first instance within
Act [Chapter 8:02] allows for the registration of awards from an six (6) to fourteen (14) months. Depending on the urgency of the
international tribunal as may be declared from time to time. matter, a party can bring an application to court on an urgent basis,
in which case the rules of court relating to time periods are relaxed.
4.5 Where the contract provides for court proceedings Appeals against decisions of the High Court may be directed to the
in a foreign country, will the judgment of that foreign Supreme Court and it normally takes 6 (six) to 12 (twelve) months
court be upheld and enforced in your jurisdiction? for an appeal to be heard and determined. Where the issue raises a
constitutional question, it may be directed to the Constitutional Court.
Yes. The Civil Matters (Mutual Assistance) Act [Chapter 8:02] All decisions and proceedings of any inferior court and of any
allows for the registration of a foreign judgment in Zimbabwe tribunal, board or officer performing judicial, quasi-judicial or
provided the judgment was handed down in a designated country. In administrative functions may be taken on review in the High Court,
respect of countries that are not on the list of designated countries, in respect of grave procedural irregularities or illegalities occurring
the judgment from a foreign court constitutes a cause of action on during the course of such proceedings.

Nikita Madya Farai Chigavazira

Wintertons Legal Practitioners Wintertons Legal Practitioners
Beverly Corner, 11 Selous Avenue Beverly Corner, 11 Selous Avenue
P.O. Box 452 P.O. Box 452
Harare Harare
Zimbabwe Zimbabwe
Zimbabwe
Tel: +263 4 250 113/29 Tel: +263 4250 113/29
Email: nikita@wintertons.co.zw Email: farai@wintertons.co.zw
URL: www.wintertons.co.zw URL: www.wintertons.co.zw
Nikita joined the firm on 1 July 2000 and became a partner on 1 July Farai Chigavazira is a Legal Practitioner in Wintertons’ Energy,
2003. He heads the firm’s Energy, Infrastructure and Natural Resources Infrastructure and Natural Resources Department, where he has
Department and is co-head of the Commercial and Corporate gained considerable experience. His practice involves corporate
Department. He has a large commercial practice and advises several & commercial law, infrastructure & energy, mining, investment,
listed and unlisted companies in relation to acquisitions, mergers, regulatory compliance and regulatory risk management matters. Prior
disposals and various types of contracts. He is currently involved in to joining the firm, he worked for Coghlan, Welsh & Guest and for the
greenfield projects in the energy sector with work covering all aspects Law Society of Zimbabwe as a Legal Assistant. He graduated with a
including the construction elements involved in such projects. He has Bachelor of Laws (LL.B.) from the University of Fort Hare and went on
handled several completed transactions for companies listed on the to graduate from the same University with a Master of Laws (LL.M.)
Zimbabwe Stock Exchange including share option schemes, rights in International Trade and Business Law. He focuses particularly
issues, mandatory offers to minorities, Zimbabwe Stock Exchange on corporate and commercial regulatory compliance, regulatory risk
Rules compliance and related matters. He has acted and continues management matters, drafting and reviewing contracts such as power
to act as local counsel for a number of international law firms handling purchase agreements, concessions, co-ordination and joint venture
investment transactions into Zimbabwe. He is also involved in advising agreements, together with general due diligence on renewable energy
local, regional and international financial institutions in various loan projects.
transactions.
Wintertons – formerly Winterton, Holmes and Hill – was founded in 1902 and provides a full array of legal services. Our commitment is to deliver the
highest quality legal services for our clients. We understand the importance of accurately interpreting our clients’ needs and delivering quick, reliable
and cost-effective legal advisory and representation services to our clients. We pride ourselves on being a modern, full-service, commercial law firm.
Our mixture of youth and experience enables us to maintain stability whilst creating innovative solutions for our customers’ needs.
Wintertons has been highly recommended as a Leading Firm in General Business Law and its Partners have been rated consistently as Leading
Lawyers by Chambers Global over the past decade.

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ICLG

The International Comparative Legal Guide to:

Published by Global Legal Group, with contributions from:

Abuka & Partners, Legal Practitioners Makarim & Taira S.

Ashurst Tim Reid

■ Paragraph 3.2.2.2 of the TRs required that “the design of the

The Court of Appeal Decision

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Saudi PPP: Lessons

It is worth first recapping some of the recognised pros and cons

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private sector companies, for the construction and/or refurbishment,

4 WWW.ICLG.COM ICLG TO: CONSTRUCTION & ENGINEERING LAW 2018

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funders protected where events occur which are outside of SPV or

Richard Dyton Simon Moore

Tel: +44 20 7825 4203 Tel: +44 20 7825 3188

6 WWW.ICLG.COM ICLG TO: CONSTRUCTION & ENGINEERING LAW 2018

Herbert Smith Freehills LLP Nicholas Downing

construction projects, particularly where the project involves parties

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David Nitek Nicholas Downing

Tel: +44 20 7466 2453 Tel: +44 20 7466 2741

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Australia Kon Nakousis

Clyde & Co Teodor Lomaca

■■ ABIC MW-2008 – Major Works Contract (standard contract

■■ AS 4902-2000 – General Conditions of Contract for Design

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the various schemes are funded by either a levy on building and

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limits on the amount of retention monies, including the amounts that

Contract clauses purporting to retain title over goods until payment

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that is necessary to secure performance of the contract: Secured

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risks (e.g. inclement weather or industrial activity), this ‘float’ time

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Where the contractor or subcontractor has acted negligently, the

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International Commercial Arbitration. International commercial

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determination. Parties are then required to prepare and serve their

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Kon Nakousis Teodor Lomaca

Tel: +61 2 9210 4416 Tel: +61 2 9210 4931

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Belarus Ivan Martynov

SBH Law Office Vitaly Tvardovskiy

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company to supervise the construction process and/or as a site

2 Supervising Construction Contracts

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■ the MCC arose due to reasons which the interested party

3. Termination for “good reasons” by the employer.

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