International construction contracts address the most common problems and allocate most standard risks accordingly. However, no perfect contract exists because of the uniqueness and unforeseeable nature of this field. While governing laws contain mandatory clauses as a rule, adjustments in negotiating and drafting procedures increase the likelihood of ambiguities and may lead to invalid provisions. Therefore, the governing (applicable) law remains of great significance in international construction.

Governing (applicable) law is agreed upon by the parties as a general rule. Despite this, many international contracts do not contain a clause defining the choice of law. This may lead to conflict of law issues and, therefore, a different risk allocation than the one that the parties intended. A great deal of international construction takes place in less-developed countries with undeveloped or not fully adopted applicable law. Therefore, the characteristics of the applicable law are a key factor. These characteristics vary depending on their common or civil law origins.

When considering contract law in its widest sense, there are a number of key differences between the Anglo-American common law and European civil law systems. The Anglo-American system has its basis in precedents and builds on customs, pragmatic approaches and emphasizes the principle of contractual freedom. The European system, on the other hand, is comprised of civil codes and is based on Roman law and legal theory. The cornerstone of the civil law system is the importance of written law and mandatory provisions. This is of great significance as they can influence original agreements between parties.

At present, both systems seem to be moving closer to each other (a similar process is taking place in the other systems such the sharia, socialist and religious law). The main differences are still apparent but, without doubt, the similarities of both systems prevail over the differences. In the United States, for example, legislators create lengthy Acts and large volumes of legislation which bind the courts. In the civil code countries, on the other hand, decisions of the superior courts often enjoy such respect that a new law is created on the basis of these decisions.

However, different approaches are especially visible in construction project management and dispute resolution. Let us consider the British example. In construction projects, the British invented some now ‘traditional’ sample contract forms used internationally that are highly developed but formal in nature. These formalities may give rise to disputes in numerous countries that follow European law. For example, the requirement to strictly adhere to the contractual procedures when dealing with claims for additional payment and extensions of time for completion, notification of claims in short periods of time and a risk of lapse of claim in cases of late notice, can all easily be seen as offending the good faith protection principle typical in civil law jurisdictions.

The sample contracts used in the large-scale international projects are often based on the common law. However, the large and rapidly growing building markets in the Middle East, South America, the former states of the USSR, Central and Eastern Europe and many African countries are heavily influenced by the civil law tradition. Therefore, tensions and uncertainty can arise when sample contracts based on the common law conflict with local governing laws and customs which are based on civil law.

A governing law can hardly be found which does not influence a particular contractual relationship. At least in cases where a contract fails to address an issue, there are the obligatory and mandatory provisions, precedents and rules of interpretation meeting the same purpose. The principles of freedom of contract and pacta sunt servanda (Latin for ‘agreements must be kept’) form the basis of construction law around the world, and ensure that there is a thriving international construction industry (Charrett, 2012). The governing law sets limits of the traditional pacta sunt servanda tenet.

From a legal point of view, the differences tend to occur in the following areas:

• delay damages (liquidated damages) versus contractual penalty;
  
• substantial completion versus performance;
  
• binding nature of adjudication awards;
  
• limitation of liability;
  
• lapse of claim due to its late notification (time bars);
  
• allocation of unforeseeable and uncontrollable risk to the contractor;
  
• contract administration (the engineer’s neutrality and duty to certify);
  
• termination in convenience;
  
• time-related issues;
  
• quantification of claims;
  
• statutory defects liability; and
  
• performance responsibility: reasonable skill and care versus fitness for purpose.

The above list is not exhaustive but serves as a summary of commonly encountered issues. Additional issues may include the right to interest, the approach to differing site conditions, changes in local laws, escalation of labour and materials, the impact of domicile in situations where some of the contractor’s performance is executed in a different location than the project (e.g. fabrication of technological plant and design), local laws in respect to dispute resolution, the impact of implied terms and general aspects of commercial law, the right to suspend the works and the consequences of suspension, the rights of local subcontractors, limitation and prescription periods, liens, specifics of local public employers, etc.

There are other particularities and risks of local construction markets and international business. For example, the availability of skilled labour, labour law, local permits, necessary licences, government regulation, political instability, government expropriation of private property and corrupt judicial systems. Some of these risks could, however, become a reason for contract renegotiation or termination entitlement with different legal consequences in particular legal systems. For example, Latin American labour laws (which tend to be more protective of workers’ rights than those in the United States) may require use of local labour and usually require significant social welfare contributions as strikes can be considered a legitimate tactic for negotiation in certain regions (Venoit, 2009).

For every large international construction project, it is highly recommended that the influence of the governing law and the efficiency of respective contractual provisions in the mentioned areas are evaluated. In the following passages, some of the issues mentioned will be dealt with in more detail to provide better context for the remainder of the book.

Delay damages are a type of ‘liquidated damages’. They are typically paid as lump sum compensation for damages. According to Anglo-Saxon tradition, liquidated damages are the sum agreed by the parties to the contract, authorizing the party suffering from the other party’s default to receive a predetermined indemnity, following a particular breach. A court will decide on the validity or level of these damages unless such future compensation is specified in the contract (damages at large).

Pursuant to common law principles, liquidated damages will not be enforceable if they are designed to punish rather than compensate. Under the principles of equity, judges strive for fair solutions instead of enforcing the conditions which lead to unjust enrichment. Two conditions must be satisfied where liquidated damages are to be awarded. First, the sum must approximately match the actual or potential damage incurred. The purpose of damages is to return the plaintiff to their original position before the damage occurred. Damages are not an instrument of profit or unjust enrichment. Second, the damages must be a reasonably foreseeable consequence of the breach. If the liquidated damages are not recoverable, the employer will be left with the common law remedy for damages.

In construction disputes, the courts sometimes refuse to enforce liquidated damages because of the doctrine of concurrent delay in cases where contributory negligence can be proved.

The common law distinguishes between such completion of work which allows the work to be used for an agreed purpose (substantial completion) and whole fulfilment of the contractual obligations (performance). Most sample forms of contracts used in international construction projects are therefore based on the substantial completion concept from the common law. This approach presumes the take-over of the work by the employer after substantial completion. Of note is that the contractor is not discharged of their contractual obligations until the performance certificate is issued. It often applies, however, in the civil law countries (pursuant to civil codes) that the ‘work is performed if completed and handed over’. In some European jurisdictions, there may be disputes about when the statutory warranty for defects is triggered (see below the Section 2.13).

Settlement of disputes in construction projects requires speed, an informal approach and expertise. This is why adjudication is commonly used. In practice, we most frequently deal with Dispute Adjudication Boards (DABs). The parties may submit their dispute to a DAB for its judgment. The DAB must decide in compliance with the process most clearly defined in the contract. Sometimes, it is also a statutory adjudication, as is the case in the United Kingdom, where either of the participants of a construction project can use the opportunity to resolve a dispute in statutory adjudication within 28 days.

In the civil law jurisdictions, the decisions handed down by DABs may be persuasive in nature but not binding or enforceable. In the common law jurisdictions, on the other hand, the decision is often final and binding if the parties do not appeal it within the contractually agreed period of time.

If the contracting parties (under a governing civil law) want to make a DAB’s decision enforceable, they can, for example, modify the DAB’s status to ad hoc arbitration. The parties can agree to use the arbitration clause for an institutional arbitration court (or for an additional ad hoc arbitration) so that this arbitration court (or the arbitrator or the arbitrators ad hoc) would become the authority to examine the DAB’s award or resolution, should one of the contracting parties challenge the award or resolution via a lawsuit. For more details, see Chapter 11.

In common law, there is a tradition of highly esteeming the principle of contractual freedom and it is generally allowed to contractually limit liability, including liability for damages. In civil law countries, however, the governing law sometimes contains provisions that do not allow the imposition of such limits. For example, provisions may be encountered that stipulate that claims for damages may not be waived before an obligation is breached that gives rise to damage.

In the majority of legal systems, however, such limitations are acceptable. Under English law, such provisions can be effective but may be subject to the Unfair Contract Terms Act (1977).

Construction contracts usually contain provisions that establish a duty to notify a claim for additional payment or extension of time in a certain period of time. If the claim is not notified, it is ‘time-barred’.

When considering time bars, it is very important to evaluate: (1) if it is possible to contractually agree on such a consequence within a particular jurisdiction; and (2) what exactly the consequence is of filing a claim notice out of time.

The precedents in respect of the admittance and status of contractually time-barred claims are generally unambiguous across different jurisdictions. Every particular time-barred claim must be evaluated individually in respect of the particular delivery method, related risk allocation, nature of the claim and the limits imposed by governing law. This issue is dealt with extensively in Chapter 9.

In some construction projects it can be efficient to allocate the majority of risk to the contractor. This is especially so where it is possible to transparently control and evaluate the risks and allow for risk contingencies in the contract price. The knowledge of the total contract price (no matter how high it is) may be an employer’s priority in certain cases. In common law jurisdictions, the contract will be usually respected and even an extreme risk shift to the contractor will be protected by the governing law. More complications can be encountered in civil law jurisdictions and the parties to the contract must recognize the existence of the following principles of civil law:

• good faith (good manners) protection;
  
• imprévision;
  
• protection of the weaker party;
  
• force majeure;
  
• hardship.

Such risk allocation has its limits also in common law jurisdictions. Parties to the contract must also be aware of the potential effects of the following principles applicable to both in common law and civil law countries:

• frustration of purpose;
  
• impossibility;
  
• impracticability.