Implied warranty and guarantee in the construction works contract
Construction works represent a significant cost for investors, but unfortunately they are not always performed professionally, i.e. according to good building practice, the recent technological developments or the design. They are also often completed much later than the contract provided for. What can the investor/owner do when they find construction defects?
According to Article 647 Civil Code (“CC”) “by a construction works contract, the contractor commits to hand over the facility provided for in the contract constructed in accordance with the design and technical know-how, and the investor commits to carry out the actions required by relevant regulations to prepare the works, especially to hand over the construction site and to deliver the design and to accept the facility and pay the agreed remuneration”. In the event of non-performance or improper performance of a facility, investors may pursue their claims against construction contractors in three ways:
- by demanding compensation for damage in line with general principles
- by enforcing the implied warranty for physical defects in the facility, or
- by enforcing the quality guarantee. As the repair of damage in line with general principles in a construction works case does not differ from any other scenario, this article only discusses the legal concepts of implied warranty and guarantee.
Implied warranty for defects
The implied warranty for defects in the construction works contract is a special form of protection for the investor/owner, which is completely independent of the fault and knowledge of the contractor and the occurrence of damage resulting from delivery of a defective object. It is a legal concept completely independent of the rights related to non-performance or improper performance of the contract in line with general principles, or the quality guarantee.
There are no detailed regulations in the Civil Code regarding the implied warranty for defects in construction works. In accordance with Article 656 § CC, “the provisions on specific work contracts apply accordingly to implied warranty for defects in the constructed facility”. This provision makes a reference to Article 638 § 1 CC which provides that “the provisions on implied warranty in sale apply accordingly to liability for defects in a work”. Moreover, this provision excludes the liability of the contractor if the defect in a work (here: construction works) arose due to a reason inherent in the material supplied by the orderer (here: investor/owner).
Therefore, the provisions on implied warranty in sale apply “accordingly” to construction works contracts. “Accordingly” means they may consist in the application of these provisions: to the same extent and in accordance with their content, or applying them with certain modifications resulting from the specific nature of the construction works contract, or not applying them at all.
In accordance with Article 5561, a “physical defect” is the failure of a facility to comply with the construction works contract. In particular, the facility is incompliant with the contract if:
- it does not have the properties it should have given the aim specified in the contract or arising from circumstances or from the purpose of the facility;
- it does not have the properties of which the contractor has assured the investor;
- it is not fit for the purpose that the investor informed the contractor of at the time the contract was executed and the contractor did not make reservations regarding this purpose;
- it was handed over to the investor incomplete.
A “facility” has a physical defect also in the event of its improper installation and commissioning (improper commissioning and installation of things in it), if these activities were performed by the contractor or a third party for which the contractor is responsible, or by the investor who followed the instructions received from the contractor.
The contractor, pursuant to Article 568 §1 CC, is liable under implied warranty if a physical defect is found within two years and, in the case of defects in real estate, within five years of the thing being handed over to the buyer. When reference is made in the construction works contracts, it refers to a “facility”.
Implied warranty period
It seems reasonable to ask whether the term "facility", used in the Civil Code for the purposes of the implied warranty, can be understood as "real estate" within the meaning of Article 568 CC. Undoubtedly, the legislator's goal was to standardize the duration of the implied warranty to all facilities that are the subject of the contractor's performance in the construction works contract.
Thus, it can be “rationally” concluded that in practice all “facilities” within the meaning of the provisions on construction works should be included in the term “real estate”, and therefore the implied warranty period should be 5 years. Of course, this will not apply to a situation where contractors do not construct a "building facility", but only renovate or finish it to some extent - in this case we are dealing with a specific work contract and the warranty period is 2 years.
Rights under the implied warranty
During the warranty period, if a facility has a defect, the investor may demand that the defect be removed (Article 561 §1 CC), and the contractor is obliged to remove the defect within a reasonable time without excessive inconvenience to the investor (Article 561 §2 CC). However, if this proves impossible or requires excessive costs, the contractor may refuse to remove the defect.
It should be emphasized that if the investor is a business entity, the contractor may refuse to remove the defect also when the costs of satisfying the claim to remove the defect exceed the amount of the contractor's remuneration. From the economic point of view, it would be unreasonable to guarantee the investor the right to demand removal of the defect in every situation. In this situation, the investor will be able to rescind the contract or demand a reduction in remuneration.
If a “facility” has a defect, the investor may also make a statement on reducing the price or rescind the contract unless the contractor immediately and without excessive inconvenience to the investor removes the defect (Article 560 §1 CC). This limitation does not apply if the “facility” has already been repaired by the contractor or if the contractor has not performed its obligation to remove the defect. The investor must not rescind the contract if the defect is insignificant (Article 568 §1 CC).
Time limits for reporting a defect
The investor's claim for removal of defect is limited to one year from the date of finding the defect. If the investor is a consumer, the limitation period may not end before the expiry of five years from delivery of the facility to the investor.
Moreover, within these time limits, the investor may make a declaration of withdrawal from the contract or reduction of the price due to a defect in the things sold. If the investor demanded the removal of the defect, the time limit for submitting a declaration of withdrawal from the contract or price reduction begins on the ineffective expiry of the time limit for removing the defect. It is worth noting that the expiry of the time limit for finding a defect does not exclude the exercise of rights under the implied warranty if the seller has fraudulently concealed the defect.
Contractual change in the scope of implied warranty
Also note that under Article 558 §1 CC, the parties may broaden, limit or exclude liability under implied warranty. Such a change in the scope of liability may take place in a construction works contract or other legal relationship. Importantly, if the investor is a consumer, limitation or exclusion of liability under the implied warranty is allowed only in cases specified in specific provisions. Therefore, contractual clauses excluding or limiting the seller's liability under the warranty, included in the sales contract concluded with the consumer, will be invalid. Moreover, in any case, the limitation or exclusion of liability under the warranty will be ineffective if the contractor has fraudulently concealed the defect.
Contrary to the rights under the implied warranty, the investor may enforce the rights under the quality guarantee when it was granted by the contractor and only to the extent that it was granted. Importantly, even if the contractor did not grant a guarantee for construction works, the investor can always enforce the rights under the implied warranty for defects described above.
The guarantee is granted by making a declaration by the contractor which specifies the obligations of the guarantor (contractor granting the guarantee) and the rights of the investor, in the event that the constructed facility does not have the properties specified in this declaration. The contractor's obligations may include, in particular, the return of the price paid, the replacement or repair of things, or the provision of other services. The parties may freely specify in the contract for construction works the guarantee period, the procedure for reporting defects, the investor's rights in the event of such defects or the consequences of the contractor’s failure to remove them.
If the procedure for reporting defects is formalized, the investor is obliged to follow the established procedure under pain of irreversible loss of guarantee rights - what should also be remembered, because if this element of this complicated "puzzle" is omitted, it may in practice prevent any pursuit of future claims.
TGC Corporate Lawyers