Earlier this year the European Commission published a Communication on European Contract Law. The idea was to start a debate on problems experienced by those involved in cross-border transactions resulting from the divergence of national contract laws. The EC also wanted to look into what action might to necessary, at European Union level, in the area of contract law.
On hearing this, I started thinking what it would be like if construction law across Europe was identical in all the member states. I know that there have been some studies in the past and attempts to explore the possibilities of harmonisation: not least the famous GAIPEC initiative. However, little, or no real progress has been made to merge the differing laws across member states into a consolidated, harmonised version.
I then started thinking how a harmonised European code might look: but my mind then turned to the quirks of the English legal system and the difficulties of adapting its approach to the laws of other member states. There are some peculiarities in the English system which European contractors and professional find quite difficult.
Defects Liability
Many contracts used in the UK provide for a defects liability period or maintenance period. The length of these periods is negotiable but often it is somewhere between one and two years. It may also be extended in relation to defects which have to be rectified during the period so that the rectified work has an equivalently long defects liability period itself.
A common misconception amongst European contractors is that the length of this period determines the full extent of the contractor's liability for defective work. Some people call it a warranty period and think that once the warranty period has ended then the contractor can no longer be responsible for defective work. That is not the case in the UK. Under English law a contractor is liable for defects in construction for up to six years after completing the work. Indeed, where a particular form of contract is used, liability extends to a twelve year period.
The defects liability period does not represent the full extent of the contractor's liability. Rather, it is simply the period during which the contractor is obliged to return to site to put right any defects which manifest themselves. Thereafter, the contractor remains liable for defects: the difference being that the employer can no longer require the contractor to put the defects right: rather, he may have to do the work himself and seek to recover the costs from the contractor.
Other European jurisdictions deal with the question of defects in a rather different way. Long term insurance coverage is more common, often known as the decennial liability insurance. Thus, if defects subsequently appear in construction, the cost of repair (and possible additional costs such as business disruption) are funded out of the insurance coverage. In the UK, this is far less common which means that the employer has to pursue the contractor, or professional designer, to recover remedial costs and associated cost, often for a long time after the expense has been incurred.
Non-payment
Non payment of monies due to the contractor is generally accepted as a ground on which the contractor may terminate its construction contract. However, circumstances arise where the contractor may well not wish to terminate; he may want to exert some commercial pressure to prise money out of the employer. Under English law, a contractor has now a statutory right to suspend work for non payment. In theory, therefore, this does give contractors a little more leverage. However, suspension, like termination, is a serious issue. Therefore, more and more payment disputes are being resolved, whilst the construction works proceed, by adjudication. In this way, an independent third party dispenses a crude form of justice within 28 days based on written submissions (or sometimes oral arguments). The adjudicator's decision, has cash flow consequences. Furthermore, it binds both employer and contractor, (or contractor and sub-contractor) until the dispute is reconsidered, usually at the end of a project, either by the courts or an arbitrator.
The concept of adjudication was designed to resolve contractual payment problems quickly, whilst enabling all parties to continue the construction work. It is a relatively new system for the UK construction industry.
Certificates
Payments is made by way of interim certificates. In reality, however, a certificate may not mean very much. A certificate does not give the contractor the comfort of knowing that the work to which payment relates has been carried out to the employer's satisfaction. Nor can the certificate be relied upon to determine the precise quantity of the works undertaken. Certification is simply a mechanism to estimate progress so that cash flows between employer and contractor as the job proceeds.
Therefore, even when a contractor receives a final certificate, this does not mark the end of the contractor's liability. The contractor remains liable for defects as discussed above. Furthermore, the final certificate itself does no more than quantify the amount paid to the contractor: it does not constitute any statement that the quality or quantity of the works is in conformity with what the specification required.
Harmonisation revisited?
Surely one of the roles the EC is to facilitate better understanding, across member states, of the difference of doing business across of the community. In a ideal world, a French contractor operating in Germany would be subject to the same construction law, as say, a German contractor working in the UK. In reality, of course, we are light years away from this scenario. My examples of the peculiarities of the English legal system, as applied to constructions projects, highlight some of the difficulties of harmonising member states' laws. And, of course, if one country were be the model on which harmonisation were to based, presumably we would all like it to be our own?
This article first appeared in Construction Europe in November 2001.
For further information please contact John Uwins at john.uwins@cms-cmck.com or on +44 (0)20 7367 2502
