Often in the execution of construction works, Investors face problems such as delays or improper execution of works. Nowadays, especially with multi-phase contracts financed by public funds and executed by different contractors, even minor disruptions can have significant consequences for investors. How, then, to adequately protect yourself in a construction contract, so that if problems arise during implementation, you can effectively influence contractors and efficiently complete the investment? A selection of the most common security methods will be discussed below.
Contractual penalties
The most common way of securing the proper performance of a contract is, of course, contractual penalties regulated by Articles 483-485 of the Civil Code. Contractual penalties:
- may be reserved for both non-performance and improper performance of the contract;
- are entitled to the amount reserved in the contract, regardless of the amount of damage suffered;
- relate only to non-performance or improper performance of non-monetary obligations.
In practice, in construction contracts we usually encounter contractual penalties reserved for:
- failure to meet the deadlines stipulated in the contract, including, in the case of staged contracts, also the deadlines specified for individual stages, as shown in the work schedule;
- withdrawal from the contract for reasons attributable to the contractor;
- failure to remove identified defects and faults within the deadlines specified in the contract.
Although the above-described general rules seem relatively simple, still the way of formulating the provisions on contractual penalties or the subsequent correct calculation of them causes many difficulties and is the cause of numerous court disputes between investors and contractors.
Bank or insurance guarantee
A bank or insurance guarantee is one of the most effective and fastest ways to seek payment. A bank guarantee has its own statutory definition, which can be appropriately applied to an insurance guarantee, since their nature is similar. Here, the bank or insurer acts as a guarantor for the payment of certain sums, related to the non-performance or improper performance of the contract, the proper removal of defects and faults or other obligations that may arise on the part of the contractor to the investor.
Examples of types of guarantees are:
- performance bond – secures possible claims of the investor arising from improper performance of the contract by the contractor;
- guarantee of proper removal of defects and faults – secures claims arising from the contractor’s quality guarantee and warranty for defects;
- guarantee of reimbursement of payment made by the ordering party to the subcontractor for construction work – secures the recourse claim of the investor in the event of payment by the ordering party for construction work to the subcontractor.
In practice, we meet both unconditional guarantees, payable at the first request of the beneficiary, definitely more favorable for beneficiaries, and those that require the fulfillment of additional prerequisites. Nevertheless, obtaining a guarantee by the Investor certainly significantly facilitates the process of claiming receivables from contractors. Thus, when determining the security provisions of the guarantee, it is worth remembering that in the case of unconditional guarantees, the beneficiary is not entitled to invoke the allegations against the beneficiary that arise from the basic relationship, that is, those to which the contractor is entitled against the investor based on the provisions of the construction contract.
Substitute performance
This method of security allows the investor, in the event of irregularities in the performance of the work, to commission a third party to perform the work. Here, however, it is important to specify in the contract the precise conditions and prerequisites after the fulfillment of which this institution can be used.
Withdrawal from the contract
Withdrawal from the contract, which is often combined with the obligation to pay a contractual penalty, also serves to protect the interests of the investor. Many times in the course of the project it may turn out that the contractor does not have the necessary facilities or experience to carry out the project. Subsequent ineffective summonses, unfulfilled declarations of the contractor cause the investment to be delayed, and the contractual penalties charged have no effect. In such situations it is necessary to define a clear procedure for withdrawal from the contract. While, of course, we have certain provisions in the Civil Code, the introduction of additional circumstances or procedures that allow termination of the contractual relationship can often significantly improve the process of investment implementation.
Summary
The collateral methods described above are the most widely used measures that investors introduce into contracts for their smooth execution. Unfortunately, despite their widespread use, there are still difficulties in practice in choosing the right safeguards, or how to word individual clauses, which can lead to lengthy litigation. A key step is therefore the proper drafting of the contract, which will take into account the safeguards and procedures for the smooth implementation of the investment.
