Peculiarities of the General Contract on Work and Labour

Order a general contract on work and labour

During last years there has been strong tendency of the development of industrial and civil construction markets in Ukraine. Essentially unlimited capacity and high demand for the real estate objects have made it the most attractive sphere for the allocation of the loan proceeds as well as spare capital. Main actors of this market have become those companies which were able to involve quite large operating assets however at the same time those companies do not posses sufficient knowledge and experience in the construction and installation operations as well as in the supervision over performance of such operations. On the other hand, explicit speculative character of the construction market has allowed for any errors in the construction projects management to be disregarded. In case the project is completed the object preserves its profitable status. However, establishment of general work and labour contract relations is one of the key conditions which determine success of the project. In the following article of the lawyer Sergey Burya you can find out about peculiarities of the general contract on work and labour and its provisions which should be primarily examined by the project owner (customer).

Absolutely all projects in the real estate sphere are performed with the participation of specialized construction companies, i.e. contracting agencies. As a rule searching for and selecting a contractor the investor is guided exclusively by the subjective criteria, namely personal references, name, personal preferences, etc. Usually customer cannot conduct an objective and deep selection because of the absence of necessary knowledge and personal experience, in particular, when such help is needed for the first time or only once.

Legal relationships which are established between the customer and contractor essentially differ from other relationships between subjects of economy and contain number of peculiarities conditioned first of all by the work process, terms of the project performance, its costs, etc.

It is important to understand that in the course of the project performance contractor advances completed works for which the customer is obliged to pay after its acceptance. At the initial stage of the establishment of such relations customer possess leading position which is expressed by the right to select contractor, to set forth conditions, etc. However, from the moment the parties exercise their rights the customer in the process of construction is deprived of such leadership and becomes dependent on bona fide and high quality performance of the obligations by the contractor.

According to the practice which has been formed in Ukraine the customer relying on the contractor’s experience accepts the draft of contract of work and labour prepared and advanced by the very contractor with few reservations and thus in fact the customer accepts the rules of the game established by the contractor.

In order to avoid serious mistakes and to achieve set goals the customer is able and has to retain leadership in contract relations, to develop and establish rigid and efficient control mechanism over the performance of the works. One of the ways to achieve the above is exactly literately composed contract on work and labour.

Preparatory Stage of the Conclusion of the Contract on Work and Labour

Let’s assume that customer has gone through the registration of the land allotment, all the stages of the agreement and approval of the project, has duly prepared and registered documentation permitting commencement of construction and has chosen contract agency. At this point the customer has come close to the stage where general contract on work and labour is to be concluded. The customer has to resolve issues related to the preparation of the draft text of the contract, clarification of the set and enlistment of the articles, its content, the customer as well has to determine what has to be reflected in the contract in general and what is to be examined thoroughly, what are the risky points and how is it possible to secure itself against a problem, controversial or conflict situation. Moreover, the other significant factor is responsibility for the accomplishment of the project, correct and controlled use of the quite large and as a rule loan proceeds.

After short analysis the customer has several options which can resolve the problem, namely: independent preparation of the draft contract, recourse to the services of the law firm or management company or consideration of the draft prepared by the contractor. Each of the options has its strong and weak points.

Independent Preparation of the Draft contract

In order to realize this alternative most probably internal lawyer of the company would have to be diverted from the main activity of the company. This in its turn will negatively influence operation of the company. Preparation of the draft general contract on work and labour requires large and continuous stage of collection and generalization of the supportive information. As a result of the absence of construction practice and experience in the drafting of such documents weak contract with the rigid provisions of discriminatory character with regard to the contractor will be composed. It is possible that this draft contract will not reflect all the needed requirements, will not be signed in its initial form and even more time will be needed for its agreement by the parties.

Perhaps the only advantage of this option is saving of the funds during the contract preparation.

Services of the Law Firm or Management Company

This choice can be divided into two options which are services of the law firm and management company (construction supervising and coordinating agency).

Law firm. In this case law firm to which the task would be delegated has to be chosen. One can address the most famous company with a well known name. Practice and personal experience show that such companies with an authority make covert mistakes during the fulfillment of such tasks. Generally the reason for this is absence of the construction experience, misunderstanding of the essence and subsequence of the construction stages and processes. Such contract most probably will be of academic character. Another important factor is high cost of these services.

Strong points of this choice is the fact that the draft contract will be prepared relatively quickly and it will contain all the requirements of the legislator to this type of documents formulated in legally correct way.

Management company. Selection of the management company will not be complicated since there are not so many management companies in Ukraine. The whole history of their business is inherently connected with the long-term construction practice. Having selected such consultant the customer for sure will avoid most common mistakes and will receive literate and balanced construction contract which can be applicable to the specific circumstances.

Most probably the customer will receive a suggestion on the complete accompaniment of the project until the moment it is put into operation.

In case investor confines itself to the services of the management company related only to the drafting of the general contract on work and labour the cost of this work will be comparable to the services of the drafting of the analogous document by the high-class law firm.

Preparation of the Draft Contract by the Contractor

This is the most widespread and typical situation for the Ukrainian market. The customer accepts prepared and standard contract which is signed after number of corrections and comments. Practice of fulfillment of such contracts puts the customer in quite tough conditions, in fact the customer is deprived of the leading position in the customer-contractor nexus and fully excludes mechanisms of financial and other influence on the contractor in case of the non-fulfillment or improper fulfillment of contractual obligations by the latter.

Advantage in case of such choice is full saving of the funds and time needed for the drafting of the contract.

Legislation Analysis

Principal sources of law which regulate relations of the customer and contractor under the general contract of work and labour are following:

• Civil Code of Ukraine (Chapter 61);
• Commercial Code of Ukraine (Chapter 33);
• Resolution of the Cabinet of Ministers of Ukraine “On the Approval of General Conditions of Conclusion and Fulfillment of the Capital Construction Contract on Work and Labour” of 01.08.2005 # 668 (hereinafter referred to as “Contracts Conditions”);
• “Regulations on Contracts on Work and Labour in the Construction of Ukraine” of 15.12.93 (hereinafter referred to as “Regulations”);
• Judicial decisions and resolutions;
• Others.

Indeed complexity of the contract relations can not be fully foreseen and regulated by a single document. Legislator sets forth discretionary norms within the frameworks of which parties by themselves determine their rights and obligations. However, even establishing such norms legislator gets mixed up and demonstrates uncertainty of the position.

For instance, according to the Contracts Conditions (paras. 83-87) the customer has to compose construction financing plan. Such plan has to be prepared and transferred to the contractor for the approval before the commencement of the works. Absence of the plan is a basis for the delay of the commencement of works by the contractor. This position of the legislator seems to be odd since financing of the contractor is corresponding condition of the timely and high quality execution of the set and strictly regulated works by the contractor in accordance with the schedule. The customer undertakes an obligation to pay for the completed and accepted works in full which does not need additional confirmation of such obligation. In case of non-observance of the schedule by the contractor financing plan is deprived of any sense or is an unnecessary ground for raising a claim against the customer.

Customer’s main interests at the construction stage remain fulfillment of the works by the contractor and putting into operation of the project in defined terms, guarantee of the quality of works accepted for this type of construction and correspondence of the costs of the projects with the determined estimate. The main interest of the contractor is first of all receipt of the profit for the fulfillment of the construction and installation works. Moreover, there are not so many Ukrainian construction companies which would indicate in the general contract on work and labour specific calendar date when the project can be put into operation.

Having received specific and secure financing plan the contractor ensures achievement of its purposes and suspension of the works at any stage do not disturb the contractor. At the same time such position is not acceptable from the point of view of the customer. Another controversial point is the rule according to which the contractor has a right to retain completed works which are not paid for. (art. 856 of the Civil Code of Ukraine, para. 97 of Contracts Conditions). Legislator does not foresee cases in which such underpayment is possible and thus either provides the contractor with secure payment or creates covert conflict in future.

Part II. “Structure of the General Contract on Work and Labour”

Order a general contract on work and labour

[ "Commercial Property" # 11 2005 ]

 

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Structure of the General Contract on Work and Labour