Contracts and performance
Standard contract forms
What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?
Professional parties commit their agreements on paper, often using standard form contracts. The most commonly used contracts for consultancy services, construction work and integrated work are based on:
- The New Rules 2011;
- the Uniform Administrative conditions for the Execution of Works and Technical Installation Works 2012; and
- the Uniform Administrative Conditions for Integrated Contracts 2005.
To a lesser degree, the International Federation of Consulting Engineers’ conditions (FIDIC) are used mostly in windmill projects.
In practice, these general terms and conditions are often deviated from, taking into account project-specific risks, but also to secure employers. Examples of deviations concern securities by contractors, penalties in case of delay and contractor liability.
Definition of ‘construction work’
How is ‘construction work’ legally defined?
Dutch civil law provides no definition of ‘construction work’. Construction work commissioned to a contractor is qualified as a work agreement as defined in the Civil Code. Pursuant to this agreement, a contractor is commissioned to carry out and complete work of a tangible nature against payment by the employer. The term ‘construction work’ is used only once in the Civil Code. A statutory 20-year limitation period applies to defects after the completion of construction work.
Dutch public law defines ‘building activity’ and ‘structure’. Such activities and objects are subject to the Environmental Permitting (General Provisions) Act, the Housing Act and related laws and regulations.
Are there any rules or restrictions on the governing law of construction contracts?
Parties that jointly undertake a construction project are, in principle, free to agree on the law that governs their construction contract. Usually though, Dutch law is chosen as governing law for projects being realised in the Netherlands. However, without a choice of forum the contract will be governed by the laws of the country in which the contractor is domiciled. Despite another choice of law, Dutch public law will apply to construction projects realised in the Netherlands.
With regard to the governing law, government contracts do not differ from regular civil law contracts. Consequently, the rules described above apply equally to government contracts.
Are construction contracts subject to any formal requirements?
Parties have a considerable degree of freedom of contract concerning contracting parties and the content of such agreements. Construction agreements can be made in any form, including verbally. However, written agreements are preferred.
The general rules on contract law impose minimum requirements and offer an outcome in case of, for example, shortcomings or unlawful actions by the parties. These rules mostly concern regulatory law from which the parties can contractually deviate.
The Civil Code also includes specific rules for various special agreements. Agreements for services and work are particularly important for construction practice. These rules apply to contracts with consultants and contractors, and mostly concern regulatory law.
Are there any mandatory or prohibited provisions in relation to construction contracts?
Any provision contrary to public order, morality or the law is void. Mandatory rules applicable to construction contracts are included in the Civil Code. For example, there are mandatory rules on the construction of a house commissioned by a consumer, which cannot be deviated from to the detriment of said consumer. Other relevant rules are predominantly found in regulatory law. However, the following rules cannot be deviated from to the detriment of employers:
- contract variations and cost increasing circumstances (contractors must warn employers of any cost increases);
- judicial intervention in the case of dissolution due to the probability of breach; and
- the non-disclosure of hidden defects.
Can any terms be implied in construction contracts?
Agreements between parties are not derived solely from the text of the written contract. The determining subjective factor is what the contracting parties were reasonably entitled to expect on the basis of each other’s statements and behaviour and all other relevant circumstances. This rule may result in an agreement deviating from the literal text of a contract. Further, a contract may not only have the legal effects agreed to by the contracting parties, but also those which, according to the nature of the contract, apply by virtue of law, use or the standards of reasonableness and fairness. However, the text is decisive as a basic rule for contracts between professional parties.
How are risks typically allocated between parties to construction contracts?
In a traditional legal relationship, contractors are responsible for implementation work on the basis of the design provided by employers. Contractors are liable for their personnel, subcontractors, materials, equipment and recourses, and for damage to the project or third parties. Save for its obligation to warn for evident faults, contractors are not liable for design faults.
Under the traditional legal relationship, employers are liable for the risks relating to permits, soil and changes in legislation.
Risk allocation differs for more integrated contracts. The risk in a construction project is generally allocated to the party that is able to control the specific matter.
Limitation of liability
How and to what extent can parties to construction projects contractually limit or exclude their liability?
Employers and contractors are free to make arrangements regarding their liability. Construction contracts often include limitations of liability, in particular pertaining to design, and indemnification by contractors against claims from third parties. Third parties are not bound by these agreements, but they regulate the way in which employers and contractors mutually allocate liability and process incidents of damage and risk.
An exclusion of liability for gross negligence or wilful misconduct is generally deemed to be void according to settled case law. Further, an exoneration clause does not apply to the extent that, in the given circumstances, it would be unacceptable according to standards of reasonableness and fairness.
How are liquidated damages typically calculated and to which liabilities are they usually applied?
Liquidated damages are usually linked to the compensation due by contractors in case of delay. Most construction contracts include a final completion date which include a penalty if not met by a contractor.
Unless otherwise agreed on, the contractual penalty will replace a claim for damages. The court may award supplementary damages to the employer if it is evident that fairness so requires. The damages can be reduced following the contractor’s demand if reasonableness so requires. Generally, the courts are less inclined to award such demands by employers or contractors having explicitly agreed on the penalty clause, with the exception of exceptional circumstances.
How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?
Force majeure events are defined in the Civil Code as a failure in performance which cannot be attributed to the obligor if it is neither due to its fault nor for its account pursuant to the law, a juridical act or generally accepted principles. As a result of force majeure, the contractor will not default and cannot be held liable for a delay in completing the project.
Parties to a construction contract can limit or extend the circumstances that constitute force majeure. This is common practice in some areas of the construction sector. The rules of mandatory law and the standards of reasonableness and fairness apply and may restrict such arrangements.
General performance obligations
What are the general performance obligations of contractors and employers?
The contractor’s main performance obligation is to carry out and complete work that meets the terms of the construction contract. The exact scope of work depends on its description and the assignment itself. Contractors must also warn employers for any evident design faults.
The main obligation of employers is the timely payment for work carried out. Generally, employers must provide contractors with the design, permit and access to the construction site. On completion, the employer accepts the work. Acceptance can take place explicitly (verbally or in writing) or implicitly (failing to cooperate in an inspection can be construed as acceptance).
How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?
Construction contracts usually record when construction work is due to start and must be completed by the contractor. The construction period can be expressed in days, working days or workable working days. A penalty clause is usually linked to the contractual completion date, giving employers some assurance for timely completion.
Contractors are, in principle, in default during the period that completion is delayed. During execution, contractors must keep employers informed of the project’s progress. Employers may demand accelerating measures from contractors. However, if the delays are not attributable to a contractor, it will not be subject to penalties and may be entitled to an extension period and additional payment.
To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?
Under the Civil Code, employers can assign variations such as additional work to contractors which are, in principle, obliged to execute it. Contractors must warn employers about the financial consequences thereof, unless employers should have understood the need for additional payment.
In practice, construction contracts include extensive provisions regarding variations. These provisions include:
- restrictions and procedures for variations (to the design or work);
- payment for variations;
- the requirement of a written assignment; and
- the possible extension of time variations.
Lastly, provisional sums, estimate quantities and adjustable quantities are also considered variations. These types of variation are usually settled by their own specific arrangements.
What are acceptable grounds for the termination of a contract?
Both parties may terminate a contract if the other is in breach. However, termination must be justified by the breach and generally requires a prior notice of default to the failing party.
The Civil Code provides employers the right to cancel a contract at any time. Employers are then obliged to pay the agreed contract sum minus the contractors’ savings.
Further, employers can ask the courts to dissolve a contract if it is likely that the work will not be completed properly or on time. Contractors can do the same if it is probable that an employer will not fulfil its payment obligation.
Moreover, construction contracts usually include clauses allowing termination in cases such as bankruptcy or suspension of payment.
Remedies for breach
What remedies are available for the breach of construction contracts?
In the case of a breach of contract, the other party has the remedies provided by the Civil Code, unless deviated therefrom in the construction contract. The other party can claim performance of the obligation breached. If performance is no longer possible or if the defaulting party remains in default, the other party can terminate the contract, provided that termination is justified.
If attributable to the defaulting party, it can be held liable for the damage and loss caused by such breach. Damages can be in addition to the performance of the obligation and as a replacement therefor. Lastly, the other party may be entitled to postpone its own obligations and to offset against claims of the defaulting party, or to invoke provided securities.