author: dr. Mátyás RADA

The spread of Covid-19 pandemic imposes major challenges on the construction industry and the real estate developers as well. The already experienced shortages in the sector regarding workforce and the prolonged deadlines for completion are likely to be further aggravated by the spread of the pandemic. According to Kapolyi Law Firm, construction of large office buildings, industrial buildings and hotels may be particularly exposed to risk because these investment projects usually employ a significant amount of workforce and use construction materials and equipment imported from abroad. Nevertheless, the Covid-19 crisis may qualify as force majeure, and contractor companies may be exempted from performing their contractual obligations within the agreed deadlines by referring to force majeure.

In case of larger real estate development projects, it means a significant risk for both the employer and the contractor if the concerned project has to be suspended or it cannot be completed in accordance with the agreed timetable because of the pandemic and subsequent government actions. By concluding a contract for construction and/or installation works, the contractor undertakes the basic obligation to construct the building in accordance with the building plans and within the agreed deadlines. He commits a breach of contract if he is unable to do so. In that case, he will face the consequences laid down in the contract, irrespective of the reasons underlying non-performance or late performance. However, he may be exempted from his liability for breach of contract in the event of force majeure.

In construction contracts, force majeure is usually defined as an exceptional event or circumstance, (i) which is beyond the control of the contracting parties, (ii) which could not have been foreseen by the parties prior to the conclusion of the contract, (ii) which could not reasonably have avoided by the parties and, (iv) which is not substantially attributable either of the parties. What event can constitute an extraordinary circumstance beyond the contractor’s control, which can exhaust the criteria of force majeure? Occurrence of war, terror event, natural and nuclear disaster and pandemic is usually cited as force majeure event in construction contracts. Accordingly, a contractor, who – due to the pandemic – is unable to complete the construction within the agreed time limit, may invoke to force majeure event if the above detailed criteria are met. The most important consequence of the occurrence of a force majeure event is that the defaulting party may be exempted from the liability of breach of contract, furthermore, he might be released from fulfilling his contractual obligations for the duration of force majeure event as well. This could practically mean that the contractor would not be obliged to pay penalty, furthermore, he could also extend the deadline for his performance by the actual duration of the force majeure event and the impediment thereto.

The employer – being the prospective owner of the building – usually enters into lease agreements – as a landlord – with the prospective tenants of the building, before or during the construction, in which agreements he undertakes to hand over the leased premises to the prospective tenants within the deadlines stipulated in these lease agreements. If the employer as landlord fails to meet the above deadlines, he may face penalty for breach of contract, furthermore, he may lose the rents to be paid by the tenants for the period between the deadlines and the actual handover of the leased premises. As the construction and utilization of commercial buildings are closely linked, the employer intends to mitigate his above detailed risks by stipulating penalty with high amount in the construction contracts.

However, Kapolyi Law Firm points out that in case of a force majeure event, it is not enough if the contractor refers to the pandemic as a well-known fact, he has to prove that its effects were not foreseeable at the time of conclusion of the contract and he has done everything to avoid and alleviate the consequences of it. Only if the above conditions are collectively met, the contractor might be released from the consequences of breach of contract and the performance of his contractual obligations due to the force majeure event. Construction contracts usually require  the contractor to notify the employer immediately if a force majeure event occurs or it will probably occur. It can be reasonably expected from the contractor to indicate in his notification how and to what extent the force majeure event prevents him from performing his obligations, what delay may be anticipated and what preventive measures he intends to introduce. Even if the consequences appear to be avoidable, a diligent contractor can be expected to inform the employer on the imminent danger and the preventive measures. Regarding the recent situation, it can safely be said that Covid-19 virus have been unpredictable, as there has been no example for this kind of pandemic or the limitations imposed by the governments following its outbreak, and there was no indication of its immediate detrimental effects on the economy. Accordingly, it can be stated with full certainty that Covid-19 virus may qualify as force majeure event.

Kapolyi Law Firm points out that the contractors must continue to make every possible effort to fulfil their contract, and if they are ultimately prevented from performing, they must be able to prove that they have been significantly constrained by the pandemic. Furthermore, they have to prove to what extent they were prevented and that they have done their utmost to eliminate any delays in the construction and to minimize the extent of the delays by means of possible restructuring of the work or any other emergency measures. For example, contractors importing constructing materials from countries concerned by import ban may be obliged to find alternative suppliers and transport routes. Similarly, in order to ensure and protect the workforce, the contractors may be obliged introduce health protection measures (e.g. prescribing the use of protective clothing) at the construction site to minimize the consequences of the pandemic. Based on the above, although the pandemic can be assessed as force majeure event, it does not automatically mean that the contractor is exempted from liability or released from paying penalty if he is unable to meet the agreed deadlines. At the moment, it may not be clearly seen what exact detrimental effects will the Coronavirus have on the construction industry, but it is reasonable to prepare in advance for possible scenarios on both sides. A diligent contractor in this situation draws up an action plan and a prevention protocol to eliminate/alleviate the risks posed by the pandemic and informs the employer about their contents. The present situation poses a serious risk to everyone, therefore the parties need to cooperate more closely and in good faith with each other and they need to inform each other about the appearing problems and the intended responses and they need to keep constantly discussing on crisis management regarding the pandemic.

Author: dr. György BOROS-GYÖMBÉR

In our last article on the construction boom’s legal challenges, we considered three cases where an appropriately drafted construction contract helps projects be executed in a timely, cost-effective manner. This paper considers two further instances, where poor drafting may result in legal disputes or even delays in the project.

Contract Price and Additional Works

There are two ways in which parties generally set the contract price: as a lump sum, or through an itemised final statement. If the latter is used, it is usually clear from the statement how the contractor would like to receive payment for the material costs and the works carried out. However, the use of a lump sum contract price – which is mainly used in large-scale, multi-phased construction projects – may lead to disputes over the contract price and additional works.

The first issue arises when defining the two concepts. ‘Contract price’ and ‘additional works’ are defined differently in the Hungarian Civil Code and in the sectoral construction regulation. It is therefore strongly recommended that parties explicitly define what they mean by these terms in the construction agreement. The Civil Code may serve as a good basis of the definition, but it has to be modified to fit the needs of the parties and the project itself.

At the beginning of a construction project, if parties agree upon a lump sum contract price, they usually must not contest that the project or a given phase of the project has to be executed at the price set in the contract. The use of ‘additional works’ further supports this agreement by listing those works, which were not considered when calculating the contract price, but still has to be carried out to satisfy technical specifications, or for the sake of using the property for its intended purpose, at no extra cost or fee. It is worth mentioning that the contractor may still claim payment for additional works which were not foreseeable at the time of signing the contract. However, it is also possible for a contract to explicitly exclude payments for unforeseeable costs.

To balance the effects caused by the use of ‘additional works’, ‘extra works’ serves to address demands made by the contractor to modify the contract price. The concept of ‘extra works’ is that if the employer demands new works to be undertaken by the contractor, or the employer modifies works during the execution phase, then it has to pay for those works.

As we discussed in the previous articles, alterations are inevitable and regularly happen during constructions. It is therefore essential to define the timeframe and means by which the contractor can claim payment for extra works and/or request an extension, and list the documents required for submission. The timeframe and method for the evaluation of requests by the employer should also be defined. In order to avoid a later dispute, it is crucial to document the order of extra works, given that it will form a part of the original contract. It is important to stipulate in the contract that the contractor may only perform the extra works, once the price and the technical specifications have been agreed upon by the parties. It is inadvisable to demand payment for extra works from the employer without prior negotiations, after the works have been finished, as in this event, the contractor’s invoice may be at risk of being rejected.

Guarantees

The means of provision (such as: bank guarantees, withholding of payments by the employer etc.) and the size of different securities form a central part of the construction contracts. Often, the enforceable claims against a security are not defined in sufficient detail in the contract. The lack of precise definitions may even legally invalidate the exercise of a guarantee, in which case the full amount may be recovered by the employer from the contractor. For instance, this may be the case if the employer uses the performance guarantee as security against penalty payments, and/or compensation claims, without an express permission provided in the contract.

Recently, bank guarantees became one of the most widely used means of providing securities in the Hungarian construction industry. When using a bank guarantee, aside from a few exceptions, the guarantor bank is obliged to pay without examining the underlying legal relationship of the parties. It is often the case, however, that while the bank guarantee was exercised, the conditions set out in the contract are not satisfied. Even if the payment is made by the guarantor, this may justify a claim for fully recovering the amount of the bank guarantee from the contractor, including accrued interest and the costs of court proceedings. The same goes for cases when payments are unduly withheld or even used by the employer. Therefore, it is crucial to not only define the claims enforceable against the guarantee, but also the means of exercising it, relevant deadlines, and to lay down the contractual method for the making a formal written request for contractual performance.

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.

It could be read and heard in the media that in the future the usage of IT devices provided by the employer for work purposes is going to be prohibited for private use following the amendment of the Hungarian Labour Code (Mt.). However, the proposed amendment is not limited to the employer’s control of the use of IT equipment. In mid-March the Parliament will consider a proposed legislation which will amend or supplement the provisions of Mt. concerning data processing. Dr. Mónika Kapetz, lawyer of Kapolyi Law Firm provides a brief summary about the most important things on this matter.

In legal areas covered by GDPR (General Data Protection Regulation), the provisions of GDPR concerning data processing have direct effect and became directly applicable in Hungarian law. However, in order to ensure the necessary legal coherence for the application and enforcement of GDPR, it became necessary for the Hungarian Parliament to adopt amending statutory provisions affecting certain sectorial laws.

The employee’s individual rights

The protection of individual rights in labor law is considered to be as priority, particularly because of the subordinate nature of the employment relationship. The protection of individual rights is not absolute. In order to operate properly, the employer shall take certain actions and create internal regulations that may concern some segment of the employee’s individual rights. These include a part of the control measures, the handling of employee data or even ordering tasks from the employee other than specified in the contract. Mt. lays down two important conditions in connection with the employer’s procedure in order to protect the individual rights. This procedure shall be solely and directly related to the proper operation of the employer, and the proper operation of the employer must also be strictly interpreted. The employer may only decide to initiate the procedure if it is strictly necessary, ie. objectively necessary. In addition, Mt. sets out the general requirement of proportionality.

“However, if the amendment will pass, the employer must also inform the employee in advance, in writing, about the circumstances justifying the necessity and proportionality of the limitation. It will give an opportunity to the employee to check the compliance with Mt.’s requirements and the lawfulness of the procedure and to take effective actions protecting his individual rights in case of a breach.” – said dr. Mónika Kapetz.

The new data processing requirements will be defined in a new subchapter of Mt., namely under “Data processing”. The amendment makes it clear, not only the employer but both the work council and trade union are entitled to request a statement or disclosure of data in order to exercise their rights or fulfill their obligations under Mt., furthermore they may request the disclosure of documents as well.

The amendment also makes it clear that the employer may manage health data generated during the occupational medical examination. About this kind of data processing the employee needs to be informed in writing.

Biometric Data Processing

The amendment makes it possible as well that in certain cases the employer may also process the employee’s biometric data in accordance with the requirements of enhanced protection of biometric data. This shall be done only to prevent unauthorized access to a thing or data in case the unlawful access would threat the life, physical safety, health, or any other interest of the employee or others protected by law. Mt. will contain an exemplary list about the values protected by law in case of which the processing of biometrics will be permitted. These such highly protected values could be the protection of classified information at confidential level, custody of firearms, ammunition, explosives, safe storage of toxic or dangerous chemicals, biological and nuclear materials and protection of property of qualified, at least particularly high value under the Criminal Code ie the protection of property worth over fifty million HUF. In accordance with the principle of accountability set out in the Regulation, the employer has to prove that the requirements of the processing of biometric data are met.

What about the certificate of criminal record?

Obtaining the certificate of criminal record by the employer was usually a difficult demand. After the amendment, Mt. will regulate those cases when the certificate might be lawfully processed. Employee’s criminal records may be processed for the purpose of investigating whether the employment of an employee or a candidate in the given job is restricted or excluded by law or by the employer. Limiting or excluding condition may be imposed by the employer if the employment of the person concerned in the given job would result in danger of damaging the employer’s significant financial interests, legally protected secrets, firearms, ammunition, explosives, toxic or dangerous chemical, biological materials or nuclear materials.

The control – usage of IT equipment

The rules on data processing arising from employer’s control powers will also be amended. Within the framework of the amendment will come into effect a rule which entitles the employee to use an information technology, computer tool or system (collectively a computer tool) provided by his employer for the sole purpose of performing his employment, unless otherwise agreed between the employer and the employee. It practically means that the focus of the regulations has been shifted from the exclusion of privacy control to prohibiting private use.

“During the inspection the employer is entitled to check the data stored on the computer tool until he can decide whether or not the data is private. The data required to verify compliance with the above limitation shall be qualified as employment related data. The same apply if the employee uses his own IT device to carry out his tasks as it is agreed between the Parties,” – the lawyer recalls.

In cases where GDPR provides the possibility of collective regulations, regulations of collective agreements may only cover issues not regulated by labor law, since collective agreements may not deviate from the provisions of Mt described above.