Italy: How To Reduce Construction Disputes

Last Updated: 19 September 2017
Article by Giuseppe Broccoli

A. Introduction

In general terms construction contracts (especially those relating to international projects) have usually a complex structure for both technical and other reasons (just consider, for instance, cultural and linguistic differences among the parties). Such complexity is even more relevant if we consider contracts for the construction of infrastructures or industrial and productive plants.

It generally takes a few years to complete this kind of works and such long period of time makes it even more difficult for the parties to cooperate, since certain of the contractual initial conditions may change (just consider labour costs or raw materials price) or because part of the management changes over the time.

Good "project management" rules are essential for a positive outcome of the project and to reduce litigations to a minimum risk.

From a legal point of view there are some basic rules that, if duly followed, help to reduce construction dispute or minimizing the risk of controversies between the Owner and the Contractor.

Clearly there is no 'one size fits all' approach for any contract. Just consider the differences between:

  • the construction of infrastructures (a bridge, a dam, a railway); and
  • the construction of production plants (a factory, a power plant);

or between:

  • a contract for the supply and the installation of (even complex) machinery; and
  • an EPC contract.

However, there are some general rules that allow, if duly applied, to minimise the risk of litigation.

B. How to reduce construction disputes: the first 5 essential rules

First, good project management rules imply that everyone involved in the contract (project manager, contract manager, document controller, in-house lawyer) act in an interdisciplinary and cooperative way.

Turning now to the basic but essential rules, they can be summarized as follows:

1. ANALYZE the contract in its entirety. In International Construction projects, the contracts are "self-regulating", meaning that they include (or try to include) every aspect of the relation between the parties to avoid discussions and disputes as much as possible, so every clause has its weight. The contracts are usually very complex, but (often) the good thing is that usually they are based on standard contracts (i.e. FIDIC, ICC or LOGIC) widely used internationally;

2. EXAMINE very carefully some specific clauses that are often read too quickly. For example, clauses that regulate:

  • the Scope of work (ie the real object of the contract): it is on the basis of the Scope of Works (including specifications) as described in the contract that the correct or incorrect performance of the Contractor is evaluated;
  • the payment terms and their relationship with the construction timescale (negative cash flow is one of the first causes of contract failure);
  • the bonds that should be provided by the Contractor or by the Owner and their conditions (unconditional bonds at first demand are the most common and their unfair or abusive calling can cause the failure not only of the contract but of the contractor itself);
  • the changes in the Scope of Work (if the procedures for change orders or variations are not well regulated by the contract, there is a true risk to end up with a dispute);
  • the completion and pre-completion tests (various disputes arise from late or unjustified execution of the tests or from the failure to properly regulate the procedure and the timing for their execution);
  • the termination of the contract and in particular the precise identification of the causes that entitle the parties to terminate the contract and the compensation that the Contractor is entitled to receive in case of termination of the contract without reason or at the Owner's convenience;
  • the dispute resolution clause which too often is not analysed with due care and the result is that, for instance, construction disputes for a huge project are to be resolved by local Courts which might not have any specialization in complex construction projects;
  • applicable law. Also in such case the contract must be analysed having in mind the law which governs the contract since there might be certain legal provisions which apply notwithstanding what is provided in the contract.

3. KEEP written and accurate documentation of every event related to the contractual relationship. Too often when dealing with the Owner, a Contractor believes that a phone call is better than a formal letter. Not only it is recommended to keep track of the correspondence with the Owner, but also to take note of any kind of event and meeting (both internal and with the Owner or the suppliers) through detailed minutes of meetings. In case of disputes, only a punctual and precise "documentary records" of the facts will allow you to reconstruct (and prove) the events;

4. NOTIFY immediately to the Owner any kind of event that gives you the right to extend the completion term or to demand any increase of contract price. Start a dialogue (which should be supported by appropriate documentation) to prevent any possible controversy. Under many standard contracts (i.e. FIDIC contracts) there is a precise timing to file a claim. Be sure to include a timing also in your contract bearing in mind that, under the applicable law, the Contractor might lose its right to submit any claim due to statute of limitation;

5. KEEP always the project timeschedule updated and use it as a live record of the events that have any impact on the execution of the project. This will allow you to prove any event that caused a delay and any related responsibility. The timescale shall not be considered as a "static" document, that can be left aside once filled out. Instead, it is one of the fundamental instruments to prove that an event might have caused a delay and to recognize any connected responsibility.

C. Some of the most frequent causes of disputes in International Construction Contracts

In general terms, in (but not only) an international construction contract, the Contractor's goal is to maximize, in a legitimate way, its profit. On the other hand, and in an equally legitimate way, the Owner wishes to spend as little as possible.

This might be the first cause of conflict between the parties.

In more practical terms, there are various reasons to explain the high level of construction disputes (in addition, as said, to cultural, legal and linguistic reasons):

  • the persistent crisis in this sector pushes Contractors to accept at-cost (or even loss making) agreements in the hope of raising some more funds from the Owner over time through claiming;
  • the description of the project, provided by the Owner, might be inadequate or generic (or it is mis-read by the Contractor). As a consequence, the Contractor offers a price that it is often not enough (if no changes occur) to bear the costs of the works done or to be done;
  • an unsophisticated management (for technical reasons, or for the lack of adequate resources) often causes difficulties in relation to both timing and proper execution of the works;
  • the Owner might delay the acceptance of the work (either reasonably or not), causing a further increase of the costs that the Contractor will not easily recover.

D. Conclusions

international construction contracts are complex agreements for various reasons, technical or purely contractual. Just consider the fact that they relate to the construction of plants or complex infrastructures.

Furthermore, such contracts are subscribed by parties with different cultural backgrounds. The cultural factor has a certain impact in the management of international contracts (just think, for example, about an agreement signed by an Italian and a South American, Arab or Indian party).

No doubt that one of the winning elements of any contract is to try to comprehend the cultures you are dealing with, understanding the differences between the Owner and the Contractor.

That being said, the above mentioned rules are rules of good sense that, unfortunately, only a few times are found to be carefully followed.

However, on the basis of practical experiences, it can be said that they are a basic tools to limit the rising of disputes that might cause severe damaging effects on the parties.

This is the first of a series of articles that we will publish on the management of construction contracts. If you wish to stay updated subscribe to our Blog.

Subscribe to our blog

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions