Reasons and ways contractors aren't paid to with impunity.
How to protect developers and end customers
How to protect developers and end customers
21.04.2020
The Union of Construction Companies addressed to the Ministry of Architecture and Construction a request aimed at improving settlements with contractors and financial situation in construction industry of our country.
The essence of the problem
Project documentation cannot account all possible factors that a contractor will meet when it starts to build a facility. Allowances and errors are common and inevitable in project documentation.
That's why the legislation establishes the obligation of a customer to consider timely the notices of the contractor about deficiencies in project documentation, the need for additional works.
Unfortunately, especially among private customers in construction of commercial facilities abuse, dishonesty, evasion from consideration of notices and payment for additional works take place.
Project documentation cannot account all possible factors that a contractor will meet when it starts to build a facility. Allowances and errors are common and inevitable in project documentation.
That's why the legislation establishes the obligation of a customer to consider timely the notices of the contractor about deficiencies in project documentation, the need for additional works.
Unfortunately, especially among private customers in construction of commercial facilities abuse, dishonesty, evasion from consideration of notices and payment for additional works take place.
A survey held by Lex Torre Law Office with the help of the Union of Construction Companies has shown:
– almost 40% of construction companies have additional works ranged from 10 to 20% in relation to works initially accounted in the project documentation and contract;
– almost the same amount of contractors note that additional works ranged from 20 to 30% of the original price;
– 23.1% of respondents mentioned that over 30% of additional works were discovered.
– almost 40% of construction companies have additional works ranged from 10 to 20% in relation to works initially accounted in the project documentation and contract;
– almost the same amount of contractors note that additional works ranged from 20 to 30% of the original price;
– 23.1% of respondents mentioned that over 30% of additional works were discovered.
As a rule, customers agree upon no more than 10% of additional works. Almost none of the customers agree upon over 20%.
As a result, additional works are not paid by the customers in more than 60% cases. They are carried out by the contractors at their own expense, which leads to bankruptcy of the contractors, non-payment to subcontractors, debts to employees.
As a result, additional works are not paid by the customers in more than 60% cases. They are carried out by the contractors at their own expense, which leads to bankruptcy of the contractors, non-payment to subcontractors, debts to employees.
The Union of Construction Companies offers the following:
- To support the initiative to de-bureaucratize the established practice of additional works execution.
- To explain whether the requirements of clause 12 of the Regulation on the procedure for the formation of a fixed contractual price for the construction of facilities, approved by the Resolution of the Council of Ministers dated 18.11.2011 No. 1553 (hereinafter - Regulation No. 1553), on execution of a trilateral act are binding for the facilities with financing from non-budget sources.
- To express the opinion on the need to timely sign additional agreements to construction contracts in case that additional works are discovered.
To highlight this problem for the "Economic Newspaper" agreed:
– What is the essence of such abuses during construction?
– Unscrupulous customers use the prevailing interpretation of law regarding additional works.
According to para. 3 and 4 of art. 698 of the Civil Code, a contractor is obliged to inform a customer about the need for additional works and an increase in the estimated construction cost, as well as to suspend corresponding works if the contractor does not receive a response to its notice within ten days, unless other term is provided by law or a contract.
If the contractor does not fulfill these obligations, it will loose the right to claim payment for additional works.
According to clause 12 of the Regulation No. 1553, in case during the construction process it is necessary to perform works (services) not accounted in project documentation, the cost of additional works shall be determined by a developer of the project documentation on the basis of a trilateral act signed by the customer, contractor and developer of the project documentation.
– What do judges of economic courts think about this situation?
Andrei Vashkevich: A number of judges require not only a trilateral act for additional works, but also an additional agreement to a construction contract.
– What is necessary for the contractor in this case to receive payment for completed works??
Andrei Sokolov: In order to get payment for additional works, it is necessary to obtain the customer's consent and also to:
- draw up a trilateral act for additional works with the participation of the developer of project documentation;
- sign an additional agreement with the customer for payment of additional works.
Unscrupulous customers use this extremely complicated documentary procedure for unjustified enrichment.
– How exactly?
Andrey Sokolov: There are several main ways:
- the customer agrees with additional works, but creates obstacles in drawing up an act for additional works, for example, does not pay the developer of project documentation for participation in drawing up the act;
- the customer agrees with the additional works, offers to draw up an additional agreement to the contract, takes the additional agreement and doesn't sign it, etc.
The contractor, in order not to violate the deadlines, with the consent of the customer continues working, performs additional works. Then the customer refuses to sign an act for additional works and/or an additional agreement to the contract.
- In this case, which side is taken by the courts??
Andrei Vashkevich: Economic courts take the side of the customer, indicating that the procedure for agreeing upon additional works has not been followed.
There are some decisions, when the courts refused to recover payments for additional works even if there was a written consent of the customer to perform the works and an act for the additional works was drawn up and signed with the participation of the customer.
At the same time, the customer did not dispute that the work was necessary, they were completed in a full volume and in an appropriate quality; he simply didn't sign the documents and didn't pay.
At the same time, the customer did not dispute that the works were necessary, they were completed in full and of an appropriate quality; the customer simply didn't sign the documents and didn't pay.
– Unscrupulous customers use the prevailing interpretation of law regarding additional works.
According to para. 3 and 4 of art. 698 of the Civil Code, a contractor is obliged to inform a customer about the need for additional works and an increase in the estimated construction cost, as well as to suspend corresponding works if the contractor does not receive a response to its notice within ten days, unless other term is provided by law or a contract.
If the contractor does not fulfill these obligations, it will loose the right to claim payment for additional works.
According to clause 12 of the Regulation No. 1553, in case during the construction process it is necessary to perform works (services) not accounted in project documentation, the cost of additional works shall be determined by a developer of the project documentation on the basis of a trilateral act signed by the customer, contractor and developer of the project documentation.
– What do judges of economic courts think about this situation?
Andrei Vashkevich: A number of judges require not only a trilateral act for additional works, but also an additional agreement to a construction contract.
– What is necessary for the contractor in this case to receive payment for completed works??
Andrei Sokolov: In order to get payment for additional works, it is necessary to obtain the customer's consent and also to:
- draw up a trilateral act for additional works with the participation of the developer of project documentation;
- sign an additional agreement with the customer for payment of additional works.
Unscrupulous customers use this extremely complicated documentary procedure for unjustified enrichment.
– How exactly?
Andrey Sokolov: There are several main ways:
- the customer agrees with additional works, but creates obstacles in drawing up an act for additional works, for example, does not pay the developer of project documentation for participation in drawing up the act;
- the customer agrees with the additional works, offers to draw up an additional agreement to the contract, takes the additional agreement and doesn't sign it, etc.
The contractor, in order not to violate the deadlines, with the consent of the customer continues working, performs additional works. Then the customer refuses to sign an act for additional works and/or an additional agreement to the contract.
- In this case, which side is taken by the courts??
Andrei Vashkevich: Economic courts take the side of the customer, indicating that the procedure for agreeing upon additional works has not been followed.
There are some decisions, when the courts refused to recover payments for additional works even if there was a written consent of the customer to perform the works and an act for the additional works was drawn up and signed with the participation of the customer.
At the same time, the customer did not dispute that the work was necessary, they were completed in a full volume and in an appropriate quality; he simply didn't sign the documents and didn't pay.
At the same time, the customer did not dispute that the works were necessary, they were completed in full and of an appropriate quality; the customer simply didn't sign the documents and didn't pay.
Example
The contractor applied to court, claiming to recover debts for completed construction works. When considering the case, the contractor explained that it had completed additional construction works, therefore the total cost of works and performance time changed. In this case, the parties did not sign additional agreements, did not change project and estimate documentation.
The court did not take into account the submitted act on additional works and the local estimate "Additional works", since there was no proper evidence of amendments to a construction contract. As a result, the court recovered the debt from the customer for construction works performed within the deadline specified in the construction contract (decision of the Economic Court of the Gomel Region dated 13 October 2017, case No. 272-5 / 2014).
The contractor applied to court, claiming to recover debts for completed construction works. When considering the case, the contractor explained that it had completed additional construction works, therefore the total cost of works and performance time changed. In this case, the parties did not sign additional agreements, did not change project and estimate documentation.
The court did not take into account the submitted act on additional works and the local estimate "Additional works", since there was no proper evidence of amendments to a construction contract. As a result, the court recovered the debt from the customer for construction works performed within the deadline specified in the construction contract (decision of the Economic Court of the Gomel Region dated 13 October 2017, case No. 272-5 / 2014).
– What is the experience with additional works in foreign countries?
Andrei Vashkevich: in neighbor countries with similar legislation judicial practice differs.
Lex Torre Law Office (Belarus) and Rö Radwan-Röhrenschef Petruczenko Tokarzewska Sp. k. (Poland) analyzed foreign judicial practice.
It turned out that in Poland the requirements for obtaining the customer's consent for additional works were minimized. Any written consent or circumstances of the case are sufficient to confirm that the customer knew about additional works.
No additional agreement, detailed estimate or act for additional works is required. In case of a dispute, the need, scope and cost of additional works will be determined by experts.
– What is the situation in Russia?
Andrei Vashkevich: there is also a positive practice for contractors in Russian Federation.
For instance, in one of the cases the court concluded that the absence of an additional agreement for additional works does not exempt the customer from paying for them. If the works have been accepted or constitute customer value, the customer intends to use them.
Payment is also charged if the contractor notified the customer of the need for additional works in connection with the project submitted after conclusion of the contract. Despite the fact that works with the customer were not agreed upon, the courts recognized the contractor's claim for their payment as legitimate (see the ruling of the FAS of North-Western District of 09.11.2007 in case No. A56-273 / 2006, ruling of the FAS of Moscow District of 08.13.2012 for case No. A40-60947 / 11-89-399, etc.).
– What is the grounding for changing practice in our country?
Andrei Vashkevich: in the legislative acts of the Republic of Belarus there are no requirements to draw up any binding documents (acts) or additional agreements for additional works.
Art. 663 of the Civil Code and other norms do not contain requirements for the form and content of the customer's consent to perform additional works.
The absence of a written additional agreement or act for additional works by virtue of art. 163 of the Civil Code does not invalidate the customer's consent. In this case, the law does not allow the use of witness statements, but the use of other evidence is allowed.
According to para. 3 of art. 394 of the Civil Code, the price of additional works in the absence of parties' agreement shall be determined at a price usually charged for similar works in comparable circumstances.
Therefore, a change in approaches to law enforcement is required.
– Why are these changes necessary for construction organizations?
Andrei Sokolov: our proposals are aimed at combating unscrupulous customers who save on project works, do not form a proper customer service, abuse their rights to detriment of the interests of contractors and end customers.
Current situation is absurd. For instance, under one of the contracts, the contractor submitted 36 written notices within a month about the need to amend project and estimate documentation and to perform additional works. The customer did not respond in writing to any of the notices. And the customer does not bear any responsibility. Moreover, it receives the result of works, for example, a finished store, in which 20-30% of additional works compared to the project documentation. And doesn't pay with impunity.
Changing practice requires no cost to the state. On the contrary, contractors will receive payment for the works performed, respectively pay taxes, pay salaries, and customers will have to take care of the normal construction management.
Andrei Vashkevich: in neighbor countries with similar legislation judicial practice differs.
Lex Torre Law Office (Belarus) and Rö Radwan-Röhrenschef Petruczenko Tokarzewska Sp. k. (Poland) analyzed foreign judicial practice.
It turned out that in Poland the requirements for obtaining the customer's consent for additional works were minimized. Any written consent or circumstances of the case are sufficient to confirm that the customer knew about additional works.
No additional agreement, detailed estimate or act for additional works is required. In case of a dispute, the need, scope and cost of additional works will be determined by experts.
– What is the situation in Russia?
Andrei Vashkevich: there is also a positive practice for contractors in Russian Federation.
For instance, in one of the cases the court concluded that the absence of an additional agreement for additional works does not exempt the customer from paying for them. If the works have been accepted or constitute customer value, the customer intends to use them.
Payment is also charged if the contractor notified the customer of the need for additional works in connection with the project submitted after conclusion of the contract. Despite the fact that works with the customer were not agreed upon, the courts recognized the contractor's claim for their payment as legitimate (see the ruling of the FAS of North-Western District of 09.11.2007 in case No. A56-273 / 2006, ruling of the FAS of Moscow District of 08.13.2012 for case No. A40-60947 / 11-89-399, etc.).
– What is the grounding for changing practice in our country?
Andrei Vashkevich: in the legislative acts of the Republic of Belarus there are no requirements to draw up any binding documents (acts) or additional agreements for additional works.
Art. 663 of the Civil Code and other norms do not contain requirements for the form and content of the customer's consent to perform additional works.
The absence of a written additional agreement or act for additional works by virtue of art. 163 of the Civil Code does not invalidate the customer's consent. In this case, the law does not allow the use of witness statements, but the use of other evidence is allowed.
According to para. 3 of art. 394 of the Civil Code, the price of additional works in the absence of parties' agreement shall be determined at a price usually charged for similar works in comparable circumstances.
Therefore, a change in approaches to law enforcement is required.
– Why are these changes necessary for construction organizations?
Andrei Sokolov: our proposals are aimed at combating unscrupulous customers who save on project works, do not form a proper customer service, abuse their rights to detriment of the interests of contractors and end customers.
Current situation is absurd. For instance, under one of the contracts, the contractor submitted 36 written notices within a month about the need to amend project and estimate documentation and to perform additional works. The customer did not respond in writing to any of the notices. And the customer does not bear any responsibility. Moreover, it receives the result of works, for example, a finished store, in which 20-30% of additional works compared to the project documentation. And doesn't pay with impunity.
Changing practice requires no cost to the state. On the contrary, contractors will receive payment for the works performed, respectively pay taxes, pay salaries, and customers will have to take care of the normal construction management.
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