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Projects, Construction & Infrastructure
All parties involved in construction projects – including contractors, employers, subcontractors and suppliers – should consider what steps they can take now to ensure that they are on a sound legal footing with respect to COVID-19 impacts when the dust settles and it becomes time to allocate responsibility for the consequences. This article sets out three practical steps that parties should be taking now to preserve their rights in respect of the COVID-19 fallout and minimise the risk of future disputes.
Swiss law is commonly used for construction contracts and is generally considered to be a safe option for good reason. But Swiss law does have some particularities that international parties might not expect. This article sets out five points that international parties should look out for when signing a Swiss law construction contract. With some forethought, parties can opt to contract out of these particularities or adequately address the allocation of risk that they entail.
The 2019 Conditions of Contract for Underground Works (Emerald Book) is a new standard form specifically for underground works that is the result of a lengthy collaboration between the International Federation of Consulting Engineers and the International Tunnelling and Underground Space Association. The Emerald Book contains several features aimed at addressing geotechnical uncertainty, including geotechnical baseline reports and mechanisms to adjust the time for completion and contract price.
New Swiss arbitration rules that are intended specifically for construction disputes contain several notable changes that may foreshadow the evolution of international construction arbitration procedures. Some or all of these innovations, which are aimed at improving efficiency and facilitating settlements, may prove to find widespread adoption among parties negotiating international construction contracts and arbitral institutions revising their rules.
Terminating a construction contract is the last resort for employers frustrated by delays, defects or other problems. Three recent Supreme Court cases illustrate some of the pitfalls of termination for employers. In all three cases, the employers' attempt to terminate for cause was construed as termination for convenience, exposing the employers to significant liability towards the contractors, including for lost profits.
Clauses that require a contractor to obtain the employer's pre-approval of the cost of any additional works are increasingly common in lump-sum construction contracts. According to a recent Federal Supreme Court decision, these pre-approval clauses will be applied strictly, subject to certain exceptions. In its decision, the court enforced such a clause to deny a contractor's claim to recover the cost of additional works performed by a subcontractor.
A recent decision by the Swiss Federal Supreme Court ruled that a contractor's duty of loyalty continues even after termination by the employer. When the contractor stops its works for any reason, it has the duty to take all necessary measures to prevent any harm to the employer and must provide to the employer all relevant information about the works.
The Supreme Court has for the first time interpreted the provisions on the pricing of change orders in the most widely used Swiss standard form contract, the SIA Norm 118. But the decision also has wider ramifications for Swiss law construction contracts. It makes clear that it should be assumed that parties to a lump-sum contract intended to contractually regulate the effect on the contract price of a unilateral change order, even if the terms of the contract are ambiguous.
Construction lawyers are frequently called on to draft or interpret extension of time clauses. But the questions of what should be in these clauses, and why they are typically included in construction contracts in the first place, receive little attention. When drafting an extension of time clause, parties will want to carefully consider whether and how to address a number of specific issues.
Swiss courts and arbitrators have addressed the interface between force majeure clauses and regulatory changes, and how they impact on the contractor's entitlements. Clauses addressing unforeseen circumstances will be construed in line with the parties' actual intentions. If they cannot be established from the text and surrounding circumstances and evidence, the tribunal will construe the clause objectively, regarding how it can be understood in good faith.
Employers should keep a watchful eye on contractor variations and ensure that they do not modify any important quality or original requirements specified in the contract. Whatever the length of the contract, the employer is duty bound to notify any deviation from the contract on final inspection. However, the courts will not protect a contractor which has fraudulently concealed a defect or prevented the employer from discovering a defect.
Employers typically have the power to vary works, including by making changes to the sequence or timing of their execution. Sometimes, these variations do not entitle the contractor to additional remuneration. However, as confirmed by a recent Federal Supreme Court decision, even a change order that is permitted under a contract could result in a breach of the employer's ancillary obligations and therefore give rise to a right to compensation.
Many construction contracts provide that the contractor must submit daily, weekly or monthly progress reports, which then serve as a basis for invoices or applications for payment certificates. In some cases, the contract provides that these progress reports must first be approved by the employer. A recent case before the Supreme Court demonstrates that, in certain circumstances, such approval may be implied through the employer's silence.
In mid-2014 the Supreme Court ruled that the requirement in the International Federation of Consulting Engineers Conditions to submit a dispute to a dispute adjudication board was a mandatory precondition for arbitration, but avoided the question of what the consequence for failing to comply should be. In a recent decision that is particularly important for international construction contracts, the court provided welcome guidance on a question that often arises in construction disputes.
A lump-sum contractor may be entitled to additional remuneration if its work is rendered more difficult due to a fault of the employer. But what happens if the contractor is aware of the employer's fault? A lump-sum contract will not protect employers from having to pay additional remuneration to the contractor for costs that the latter has incurred due to a fault of the employer or its representatives.
The Federal Supreme Court has limited an owner's right to terminate a contract in case of delays attributable to the contractor. The owner's interest in terminating the entire contract must be worthier of protection than the contractor's interest in keeping it in place for the works that are on time. Owners should avoid setting unreasonably short time limits to remedy delays and contractors should object immediately to unreasonably short grace periods.
In a recent decision the Supreme Court clarified the relevance of the Swiss Society of Engineers and Architects' standards for planning and construction in relation to the owner's third-party liability. The court held that an increase of technical norms indicates an increased risk arising from the respective work, against which the owner must take all reasonable and adequate protective measures.
The Federal Supreme Court recently analysed whether dispute adjudication board (DAB) proceedings are a precondition that must be met before resorting to arbitration under the International Federation of Consulting Engineers (FIDIC) Conditions of Contract. The court recalled that the introduction of the DAB in the FIDIC conditions was to allow for an efficient resolution of disputes arising during construction works.
Sanctions imposed by the Swiss government are of particular importance to the international construction industry. Construction contracts governed by Swiss law may be deemed null and void if they are in breach of sanctions, regardless of whether the parties have any link to Switzerland. Construction practitioners should therefore note a new ordinance imposing commercial and financial restrictions against Russian interests in relation to Ukraine.
An owner refused to pay for alleged additional work, claiming that it had not been aware of any changes. The contractor sued the owner claiming the amount it quoted for the new work. The Supreme Court accepted that an owner could be ordered to pay a contractor for the value of the work as a whole. The case highlights the clash between contractual requirements of form and good-faith reliance on the other party's conduct.
Switzerland has adopted a number of sanctions against Iran. These sanctions may affect construction contracts if, among other things, one of the parties is blacklisted or the construction contract concerns works falling under the restrictions imposed by the sanctions. Any breach of the sanctions would be considered to be illegal and entail the nullity of the contract.
The statutory time limit for warranty claims has been extended from one to two years. The two-year time limit is mandatory only for consumer contracts. Contracts between businesses may still provide for shorter limitation periods for warranty claims. In addition, a recent revision of the Unfair Competition Act allows tribunals to invalidate general terms and conditions that are unfair towards consumers.
The Federal Supreme Court recently confirmed that a main contractor can align the contractual time bars for warranty claims against its subcontractors with the time limits applying to warranty claims that the owner has against the main contractor. This decision is relevant for both main contractors and subcontractors involved in large construction projects.
The controversial issue in a recent court of appeal case was whether the contractor still had a claim for compensation, despite its failure to submit progress reports and have them signed by the owner. The court ruled that in the absence of the contractually agreed progress reports, the contractor was still entitled to compensation but should establish (the amount of) its claim by other means of evidence.
The Supreme Court recently confirmed that an owner may rescind a contract for works if the contractor is in default. Before doing so, the owner must put the contractor on notice and grant it a reasonable grace period. In the present case, the contractor failed to reach agreed-upon output requirements and its delivery of the works was late. The court held that no prior notice or grace period was required in these circumstances.
It is expected that the upper house of the Swiss Parliament, the Council of States, will approve an amendment to the Code of Obligations which will align Swiss law on warranties with the UN Convention on Contracts for the International Sale of Goods and the EU Sale of Consumer Goods Directive. Since the rules on warranties applicable to the sale of goods under Swiss law also apply to contracts for works, the extension of the time limit will also impact on Swiss construction law.
The scope of liability between owner and contractor with regard to subsoil conditions that affect the location where works are performed is often a source of dispute. The Supreme Court recently applied the duty of care in a case where a contractor's equipment was damaged by obstacles on the ground. The court's findings may be applied to construction contracts in general.
Contracts for works are regulated by Articles 363 to 379 of the Code of Obligations. The interface between these specific provisions and those applicable to all contracts under the General Part of the code raises thorny issues, as was illustrated by a recent Federal Supreme Court decision in which the court had to deal with the remedies available to the owner in case of the contractor's default.
In two recent decisions, the Federal Supreme Court has reaffirmed a number of rules regarding defect notices. While neither judgment overturned or modified existing precedent, the principles underlying the court's findings are of paramount importance for contracts governed by Swiss law.
The Gotthard Base Tunnel is part of the Sfr20 billion AlpTransit project to build a new rail link through the Alps, with the objective of creating a direct and level route for high-speed passenger and freight trains. The Gotthard tunnel project was one of the first in Switzerland where foreign contractors were admitted to bid, and they were actually awarded many of the lots.
Many of the international arbitrations conducted in Switzerland relate to construction and engineering contracts and contracts for the supply of equipment for industrial plants and construction projects. A Federal Supreme Court decision sheds light on an award that dealt with the relationship between statutory and contractual grounds for termination of a works contract where the failure of performance tests was alleged.
In a recent case before the Geneva Court of Appeal concerning a delay in the completion of a sophisticated building management system, the court provided some clarification on the relationship between the contractor's right to interim measures of protection and the owner's right to replace the original contractor in case of defective performance or delay.
A recent Supreme Court decision confirmed the opinion that, in the event of the discovery of a defect with uncertain liability between multiple contractors, the owner must establish not only the existence of a defect, but also which contractor is contractually liable for that defect. Only at that point does the time limit to notify defects commence.
A recent case demonstrated that, in disputes over a consortium member's refusal to pay for supplies additional to those stated in the building contract, a contractual veto right is not unlimited. The case showed the member's right to refuse to provide additional supplies without additional payment, although it is unlikely that a veto right could allow a party to refuse to provide such supplies where additional payment has been offered.
Bank or parent company guarantees can be used in construction projects to guarantee payment by the employer, delivery of the project, performance of the works or that a party keep a tender offer open during a certain period, among other things. In 2008 the Swiss Supreme Court rendered three important judgments dealing with disputes arising from these guarantees.
Short time limits for notices are a typical feature of construction contracts and statutes. In practice, disputes often arise regarding the date on which a defect was or could have been discovered, the nature of the defect (apparent or hidden) and the validity of the notice of the defect. The Supreme Court addressed some of these issues in a recent decision.
Swiss law and many international standard forms contain requirements which owner's defect notices must meet. In a recent case involving defective material used by the contractor, the Supreme Court highlighted the stringent requirements as to the form and substance of the notice, but added that the circumstances may warrant more lenient application. The court examined statutory remedies available to the owner.
Public tenders for construction projects in Switzerland are heavily regulated by federal, cantonal and municipal laws. This update identifies a number of issues which foreign contractors may have to deal with in case they participate in tender proceedings in Switzerland.
Swiss law distinguishes between terminations of contract for good cause and those for convenience. While the former are premised on proof of the contractor’s fault, the latter provide the employer with a right to terminate at any time, provided that it fully compensates the contractor. In a new precedent the Supreme Court introduced the possibility of reducing the amount of such compensation on equitable grounds.
The outcome of a recent construction dispute indicates that contracts providing for cooperation between contractors should establish expressly the consortium's relationship with third parties. If the members of the consortium sign a contract with third parties jointly, they should clearly determine the circumstances in which one of the partners can alone negotiate with, settle claims and sue the third party.
The Federal Supreme Court recently elaborated on some crucial aspects of construction law, particularly relating to the pricing of works beyond the initial scope of the contract issues. The scope of the engineer's powers of representation and the consequence of a party's failure to object to any aspects of the contract during the performance of the works were also addressed.
The Swiss Federal Supreme Court has elaborated on the conditions that must be met before the owner can request a third party to remedy defects allegedly caused by the contractor. Contractors confronted with an owner's defect notice are well advised to draft their reply carefully in order to ensure that the owner cannot order a third party to perform the works at the contractor's cost.
A recent construction dispute concerned alleged defects. The supplier argued that the owner had taken over the plant and that the claim for defects was time barred. The owner claimed that it had not yet taken over the plant and that the defect liability period had not begun. The tribunal held that delivery and taking over are in fact the same event, and that the works need not be without defect to be delivered.
Swiss law often applies to international construction contracts. It is concise and easily accessible, and is often chosen as 'neutral' law to govern the main contract in a construction project and, more frequently, ancillary contracts - in particular, subcontracts. In the absence of a choice of law, the Swiss conflict of law rules point to the law of the party providing the service - that is, the contractor.