Terminating a construction contract is the last resort for employers frustrated by delays, defects or other problems. Three recent Supreme Court cases illustrate some of the pitfalls of termination for employers. In all three cases, the employers' attempt to terminate for cause was construed as termination for convenience, exposing the employers to significant liability towards the contractors, including for lost profits.
Clauses that require a contractor to obtain the employer's pre-approval of the cost of any additional works are increasingly common in lump-sum construction contracts. According to a recent Federal Supreme Court decision, these pre-approval clauses will be applied strictly, subject to certain exceptions. In its decision, the court enforced such a clause to deny a contractor's claim to recover the cost of additional works performed by a subcontractor.
A recent decision by the Swiss Federal Supreme Court ruled that a contractor's duty of loyalty continues even after termination by the employer. When the contractor stops its works for any reason, it has the duty to take all necessary measures to prevent any harm to the employer and must provide to the employer all relevant information about the works.
The Supreme Court has for the first time interpreted the provisions on the pricing of change orders in the most widely used Swiss standard form contract, the SIA Norm 118. But the decision also has wider ramifications for Swiss law construction contracts. It makes clear that it should be assumed that parties to a lump-sum contract intended to contractually regulate the effect on the contract price of a unilateral change order, even if the terms of the contract are ambiguous.
Construction lawyers are frequently called on to draft or interpret extension of time clauses. But the questions of what should be in these clauses, and why they are typically included in construction contracts in the first place, receive little attention. When drafting an extension of time clause, parties will want to carefully consider whether and how to address a number of specific issues.
Employers should keep a watchful eye on contractor variations and ensure that they do not modify any important quality or original requirements specified in the contract. Whatever the length of the contract, the employer is duty bound to notify any deviation from the contract on final inspection. However, the courts will not protect a contractor which has fraudulently concealed a defect or prevented the employer from discovering a defect.
Employers typically have the power to vary works, including by making changes to the sequence or timing of their execution. Sometimes, these variations do not entitle the contractor to additional remuneration. However, as confirmed by a recent Federal Supreme Court decision, even a change order that is permitted under a contract could result in a breach of the employer's ancillary obligations and therefore give rise to a right to compensation.
Many construction contracts provide that the contractor must submit daily, weekly or monthly progress reports, which then serve as a basis for invoices or applications for payment certificates. In some cases, the contract provides that these progress reports must first be approved by the employer. A recent case before the Supreme Court demonstrates that, in certain circumstances, such approval may be implied through the employer's silence.
In mid-2014 the Supreme Court ruled that the requirement in the International Federation of Consulting Engineers Conditions to submit a dispute to a dispute adjudication board was a mandatory precondition for arbitration, but avoided the question of what the consequence for failing to comply should be. In a recent decision that is particularly important for international construction contracts, the court provided welcome guidance on a question that often arises in construction disputes.
A lump-sum contractor may be entitled to additional remuneration if its work is rendered more difficult due to a fault of the employer. But what happens if the contractor is aware of the employer's fault? A lump-sum contract will not protect employers from having to pay additional remuneration to the contractor for costs that the latter has incurred due to a fault of the employer or its representatives.
The Federal Supreme Court has limited an owner's right to terminate a contract in case of delays attributable to the contractor. The owner's interest in terminating the entire contract must be worthier of protection than the contractor's interest in keeping it in place for the works that are on time. Owners should avoid setting unreasonably short time limits to remedy delays and contractors should object immediately to unreasonably short grace periods.
The Federal Supreme Court recently analysed whether dispute adjudication board (DAB) proceedings are a precondition that must be met before resorting to arbitration under the International Federation of Consulting Engineers (FIDIC) Conditions of Contract. The court recalled that the introduction of the DAB in the FIDIC conditions was to allow for an efficient resolution of disputes arising during construction works.
Sanctions imposed by the Swiss government are of particular importance to the international construction industry. Construction contracts governed by Swiss law may be deemed null and void if they are in breach of sanctions, regardless of whether the parties have any link to Switzerland. Construction practitioners should therefore note a new ordinance imposing commercial and financial restrictions against Russian interests in relation to Ukraine.
An owner refused to pay for alleged additional work, claiming that it had not been aware of any changes. The contractor sued the owner claiming the amount it quoted for the new work. The Supreme Court accepted that an owner could be ordered to pay a contractor for the value of the work as a whole. The case highlights the clash between contractual requirements of form and good-faith reliance on the other party's conduct.
In two recent decisions, the Federal Supreme Court has reaffirmed a number of rules regarding defect notices. While neither judgment overturned or modified existing precedent, the principles underlying the court's findings are of paramount importance for contracts governed by Swiss law.
Many of the international arbitrations conducted in Switzerland relate to construction and engineering contracts and contracts for the supply of equipment for industrial plants and construction projects. A Federal Supreme Court decision sheds light on an award that dealt with the relationship between statutory and contractual grounds for termination of a works contract where the failure of performance tests was alleged.
In a recent case, the Supreme Court finally addressed the question of what the consequence for failing to comply with a mandatory pre-arbitral condition should be. The decision is particularly important for international construction contracts and other contracts in the energy sector, which often contain multi-tier dispute resolution clauses requiring parties to resort to mediation, conciliation, dispute boards or dispute adjudication boards before initiating arbitration.
In the aftermath of the Japanese earthquake and the accidents that ensued at the Fukushima nuclear power plants, the Swiss Federal Department of Environment, Transport, Energy and Communications has suspended the authorisation process for the construction of new nuclear power plants in Switzerland. The suspension will be in effect "until safety standards have been carefully reviewed and if necessary adapted".
The Gotthard Base Tunnel is part of the Sfr20 billion AlpTransit project to build a new rail link through the Alps, with the objective of creating a direct and level route for high-speed passenger and freight trains. The Gotthard tunnel project was one of the first in Switzerland where foreign contractors were admitted to bid, and they were actually awarded many of the lots.