Why Construction Arbitration is Complex? (IX)

Ever noticed how construction claims almost never are raised by one party only?

In the new article, we flip the board and explore the claims that employers typically bring against contractors. Defective works, punch lists, performance issues and on-demand guarantees take the stage.

The client may also make claims against the contractor for non-compliance with the contract. In summary, the following are the most frequent claims. 

1. For defective work. 

This claim may occur as the execution of the work progresses if the contractor does not correct the defects in the work being executed, following the pertinent instructions given in this respect. 

Deficiencies may also appear when the contractor completes the work and delivers the entire work to the client.

Protocols and tests are usually established to review the executed work and check that it has been executed in compliance with all the agreed specifications and technical requirements. I

t is usual that, when it is necessary to correct deficiencies, the Engineer produces a punch list of work to be corrected by the contractor and a deadline to do so.

The consequences for the contractor of not correcting the deficiencies within the deadlines and conditions may be diverse and depend largely on what has been agreed in the contract or on the remedies established by the applicable law.

They may consist of the imposition of penalties or fines, the payment of liquidated damages under common law, the termination of the contract or the reduction of the price of the work if it does not comply with the agreed specifications. The latter is even more relevant in the case of industrial plants that must meet certain operating, productivity or performance requirements. 

Defects may be apparent and manifest at the time of acceptance of the works or they may arise later once the work or plant has been put into service.

These are the so-called latent defects that may appear later. It is common for a warranty period or defects notification period to be agreed in the contract after the taking over of the work. The contractor must complete any outstanding work or repair defects.

Sometimes the client may have the right under the contract to withholding a certain percentage of each payment or its equivalent to be provided by a bond or guarantee. Both will be returned or cancelled when it is proved that such defects do not exist. 

2. Execution of guarantees.      

When the client has a dispute or claim against the contractor, he sometimes enforces the performance guarantee provided by the contractor, as a means of receiving the cost of remedying the defects.

This usually happens when the contractor fails to repair deficiencies that is required to correct. It may also occur when the dispute has reached such a level of controversy that the client fears that the completion of the work may be at risk. 

Normally the guarantees are issued by a bank or financial entity “on a first demand basis", i.e. with an abstract character and unlinked to the main contract, so that they lose the accessory character proper of any bond and become a sort of "bearer check" that the client can easily cash.

In this way, the client receives the amount to which he believes he is entitled, and the bank charges the amount to the contractor. The latter must then make a claim against the client to prove that the defects or non-compliances attributed to him do not exist or do not reach the amount enforced, to try to recover the amount paid. 

In these cases, the contractor usually applies seeking an injunctive relief, either before a court or before an arbitration tribunal.  The request can also be made before an emergency arbitrator, if the rules of the institution to which they have submitted to allow it.

In practice, these interim measures are not often granted, especially if the client is solvent, due to the abstract and first-demand nature of the guarantee. 

In English law, the courts are very reluctant to provide this interim protection, except in case of fraud, when the execution of the guarantee is subject to exceptions or conditions or when the requirements agreed for its execution have not been met, such as, for example, the need to provide a technical report evidencing the defects or when the client has not complied with other contractual obligations. 

In Spain, the courts usually require, to suspend the enforcement of these types of guarantees, that the applicant of the interim measure evidences the "fumus boni iuris", i.e, that there is a prima facie case.

It is also necessary to prove the "periculum in mora", i.e. that there is a danger in the delay. The requesting party must prove that there is a real risk of suffering irreparable harm due to the delay of a legal procedure.

This may occur if he finally prevails in his claim, and he will not be able to recover the amount claimed, for example, if there is a risk that the client is or will be close to a situation of insolvency. 

With this article we finish the analysis of the claims that the parties to a construction contract most frequently make to each other. 

In the next article we will see the different alternative means of resolving the dispute before resorting to arbitration. 

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