Legal challenges of the construction industry boom Part 1
The legal challenges of the construction industry boom – The construction contracts PART 1.
According to the most recent data published by the Hungarian Central Statistical Office, the volume of domestic construction production increased by 67,6 % in March 2019 compared to the same period of previous year. The recent record growth, along with the shortage of labour in the construction sector and the shrinking capacities, leads to fierce competition among real estate developers.
It is not widely known that a properly prepared construction contract may provide a significant advantage over the competitors, even with the same pricing. In the followings, we provide an overview about three areas, where a properly detailed contract may result significant savings for the contracting parties.
Planning
In the preparatory phase of a new construction investment, the first question is whether the preparation of the design documentation should be the duty of the client or the (general) contractor. It seems to be obvious that the contractor is supposed to be exclusively responsible for the content of the design documentation. However, even in this case, it is important to clarify in the contract to what extent does the contractor have to examine the technical feasibility of the client’s expectations in connection with the investment.
It is even more important to regulate the responsibilities and liabilities in connection with the design documentation, if the documentation is provided by the client. In such cases, it is recommended to define and determine thoroughly the scope of the contractor’s inspection and reporting obligations in order to prevent subsequent legal disputes. It is very common that the contractor refers to the deficiencies in the documentation provided by the client and bills more for additional/supplementary work. In order to avoid this, a sufficiently detailed contractual arrangement may protect the client’s best interests and provide him with the opportunity to reject the contractor’s bill for additional/supplementary work referring to the contractor’s due diligence obligation.
Managing the requests for changes during the construction
It is equally important, but often neglected, to address the requests for changes during construction. Such requests typically concern the technical content of the project (requests for additional/supplementary work), but they can also affect the deadlines and the price as well.
„The changes are inherent and usually inevitable parts of construction investments. Therefore, it is advisable to stipulate an adequate mechanism in the contracts, which can effectively handle any kind of changes, even without negotiating and signing a separate contract amendment” – highlights dr. György Boros-Gyömbér.
FIDIC contracts – which generally devote a separate chapter or article to address the changes and requests for additional/supplementary work and reflect the international experience accumulated over the past decades – may provide a good basis for creating a proper change mechanism. These provisions with the assistance of a legal expert may be transposed to non-FIDIC based contracts as well.
Technical handover
Although, the relevant domestic construction laws regulate in a detailed and binding manner the tasks to be performed during the completion of a construction project (technical handover, performance certificate, handover of the construction site), several issues may still arise that may lead to legal disputes between the parties.
It usually happens that the contractor considers the construction as completed, however an inspection reveals – or it is already apparent – that the constructed facility suffers from serious deficiencies. In this case there may have been several technical handovers between the parties, which may lead to disputes as to when and to what extent be the contractor entitled to issue an invoice and obtain the certificate of performance from the client. At the end of the handover process, due to settlement disputes, the contractor may also refuse to hand over the construction site, which may obstruct the permitting procedure for occupancy permit, significantly delaying the completion of the project.
Due to the uncertainties in the handover, the commencement of the warranty period and the date of the provision of securities may be also contested.
“These risks can be well managed by stipulating the handover process in the construction contracts with respect to the relevant laws, furthermore by determining properly the date and conditions regarding the issuance of performance certificate and the invoicing procedure– closed the expert of Kapolyi Law Firm.
