Country Impact Contributor Australia

FROM ICP-NET Downturn update In early March 2009, Edward Corbett invited ICP colleagues around the world to offer their impressions of the impact g...
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FROM ICP-NET Downturn update In early March 2009, Edward Corbett invited ICP colleagues around the world to offer their impressions of the impact global economic downturn has made upon

construction activity in their country or those they have knowledge of. Edited versions of the contributions received are set out below. They reflect that, while the global financial crisis may have had its origins in the US sub-prime mortgage market, its effects have

now spread to every corner of the globe. Just as those impacts are – with certain exceptions – remarkably similar across the construction law world, so too are the strategies being employed by governments and the industry to address these impacts.

Country

Impact

Contributor

Australia

Developers have been particularly hit with the downturn and most expect the sector to slow. Developers have been posting losses in the hundreds of millions of Australian dollars for 2008–09, mainly due to write-downs and suspension of developments. New developments have slowed, but demand from first-time home buyers remains strong. A fall in construction has not supported positive housing finance figures. The total value of construction fell by 0.3 per cent for the December 2008 quarter, seasonally adjusted, to A$36.54 billion (approximately US$25 billion). Dwelling finance figures showed a rise of 5.9 per cent for the quarter. In fact, the value of dwelling construction fell by 1.2 per cent, while non-dwelling construction rose by 1.9 per cent. Some mining infrastructure projects have resorted to the termination for convenience option in order to freeze further expenditure. Some public works projects had initially been suspended but with the economic stimulus package announced by the Federal Government there are moves on foot to resuscitate a flagging construction industry by pumping money into infrastructure projects. There have been other consequences which may have an impact on the market in the future. For instance, the downturn in Australia’s construction industry has forced many apprentices to be laid off or stood down without pay. Many employers have also decided not to take on new apprentices in 2009. Employers say the number of positions available for apprentices in sectors such as transport, hospitality and business has fallen by 60–70 per cent.

Rashda Rana Holding Redlich, Sydney rashda.rana@ holdingredlich. com.au

The crisis has already started to have an impact on the Brazilian economy. However, as it cannot be considered a fiscal crisis, public works seem to remain on track. Both private initiative and public sector are relying upon public works to sustain Brazilian economic activity throughout 2009. As private financial credit for developers has been growing scarce, the Federal Government has been taking actions aimed at guaranteeing financing by means of public resources. Likewise, Brazilian National Development Bank by-laws have been amended in order to enlarge its lending capacity, and there has been the creation of a federal guarantor fund for electricity projects [see also note on pages 3-4].

Antônio C Meyer ameyer@mmso. com.br

Brazil

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John Sharkey AM Deacons, Melbourne john.sharkey@ deacons.com.au

Construction Law International Volume 4 No 2 June 2009

Chile

China

The economic crisis has so far caused a suspension of construction works amounting to around US$10 billion. US$8 billion accounts for suspension of mining-related construction projects, most of them with no clear date to re-start. US$808 million is attributable to suspension or cancellation of agro industry and construction of industrial facilities. US$600 million alone corresponds to the suspension of a major project for the construction of a landmark shopping mall and business complex which included an office building that was designed to become Chile’s tallest building. In general real estate business, private developers are the most affected and around 65 per cent of projects have been postponed. Real estate entrepreneurs have stated that no new projects are planned to be initiated in the near future. The hydro-electric sector seems to have resisted the crisis so far better than most other areas as no major suspensions have yet been announced. It is estimated that construction-related unemployment during 2009 will mean around 90,000 unemployed construction workers. However, public works are continuing as part of the Government’s measures to mitigate the impact of the crisis. It is estimated that around CH$200 billion (approx US$350 million) will be invested for new works, studies and consultancies and, as of April 2009, around CH$140 billion will be invested in infrastructure projects. The Chilean Chamber of Commerce is currently estimating 0.8 per cent growth for the construction area for 2009.

Engineering and Construction Group of Carey & Cia [email protected] [email protected]

A stimulus package of RMB1.5 trillion (approximately US$220 billion) has been announced. This is focused on transportation, rural infrastructure and housing. Large projects have been announced but it is unclear when work will actually commence.

Pinsent Masons

Note: All information has been gathered through press articles of various sources without independent verification.

Hong Kong A large list of public works projects has been announced as part of a stimulus package. Many of these projects were already planned but have been accelerated so that work will start in the near future. The main new projects are all related to various metro rail extensions. The stream of private projects has slowed. Macau A 10 billion patacas (approximately US$1.25 billion) stimulus project has been announced, focused on infrastructure development. Private construction has come to a halt, with high profile projects suspended indefinitely as they were financed by the now-struggling gaming sector. Czech Republic

Private sector construction – houses and commercial premises – has fallen because developers stopped many new projects due to the lack of financing from the banks and a substantial drop in demand. Only the construction of already-running projects continues. The real estate market is frozen, and a fall of prices is expected. Nevertheless, big players do not wish to discount and everybody is waiting for further developments. The standstill leads the building companies to the public sector which is the only one to grow. The government is expected to sustain the construction sector, in particular small and medium firms, by funding the reconstruction and heat cladding of panel buildings, from both its own and EU funds.

Construction Law International Volume 4 No 2 June 2009

Oldřich Baroch Baroch Sobota, advokátní kancelář [email protected]

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from icp-net Germany

Decrease of new orders to architects for commercial building by one half in Q4 of 2008. Central Association of Construction Industry (ZDB) is expecting a difficult year in 2009 but no start of a new recession. Despite a decrease in commercial buildings, a moderate overall increase of building investments by 0.8 per cent is expected in 2009, also due to the stimulus package.

Axel Kunze Norton Rose LLP, Frankfurt axel.kunze@ nortonrose.com

India

The global economic crisis has had an undeniable impact on construction activity in India. Certain sectors like real estate have been adversely affected; due to weakening demand, not many new projects are being announced and developers are attempting to complete pending projects. Projects in certain core infrastructure sectors, such as power, have been affected but new projects are still being pursued. The bidding process for an ultra mega power project was delayed, due to several reasons, including the economic downturn which created difficulties in raising funds for projects. Several policy initiatives have also been taken to relieve the credit crunch in the market. The external commercial borrowing norms have been liberalised, with certain specific benefits for the infrastructure sector. For example, with effect from September 2008, the limit of US$100 million for borrowings to meet rupee expenditure under the approval route has been enhanced to US$500 million per financial year for borrowers in the infrastructure sector. In addition, a stimulus package was announced in the last week of February 2009 under which rates for service tax and excise duty (except for certain products) have been reduced; it is expected that the real estate sector and developers of large infrastructure projects would benefit from the package.

Rajiv K Luthra Founder & Managing Partner, Luthra & Luthra Law Offices, New Delhi [email protected]

Malaysia

The construction industry has already felt the impact of the economic crisis, in particular, private commercial and industrial projects. The government has taken steps to assist the industry. An allocation of RM4 billion (approx US$1 billion) to the industry was made under the government’s RM7 billion first stimulus package at the end of 2008. On 10 March 2009 the government announced a RM60 billion second stimulus package, part of which is going to public infrastructure projects and the building of new homes, schools and amenities in rural areas.

Wilfred Abraham Zul Rafique & Partners wilfred_abraham@ zulrafique.com.my

Mexico

185 private real estate projects suspended (according to the Real Estate Development Association (Asociación de Desarrolladores Inmobiliarios)). According to this association, this is not for lack of money, but lack of trust in the market. This means that US$4.5 billion dollars will not be invested this year. Committed public works contracts are continuing. There is a expectation of an increase of public works at a Federal and State level.

Roberto HernándezGarcía COMAD, SC rhernandez@comad. com.mx

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Note: Our response is based on information from sources in the public domain.

Construction Law International Volume 4 No 2 June 2009

The Netherlands

New housing projects are down by about 50 per cent. Direct investments in real estate dropped from €12.8 billion in 2007 to approximately €4.7 billion in 2009, which will have an impact on development of other new projects (office, retail down to less than 75 per cent). New infrastructure projects are being planned but preparation/ zoning/planning and regulatory issues have a long lead time. Since most contractors are still busy completing pre-crisis contracts it is expected that the construction industry will face its worst blow in history as from Q3 2009. The first bankruptcies have already been reported, also due to (lack of) refinancing issues and higher interest rates.

Arent van Wassenaer Allen & Overy LLP arent. vanwassenaer@ allenovery.com

Peru

Mining companies have cut back on their investments and some of their projects have been suspended. Private investment at the top end of the real estate market has also been reduced. On the other hand, private investment at the middle and lower economic levels of the real estate market is growing as there is funding available and the demand is expanding. Public investment in public works and PPPs should see significant increases. Also, the government is allowing construction companies to partially offset their tax burden against investment in certain public works. The combined effect of these factors should result in an increase of approximately 13 per cent in the construction market during the year 2009.

Jaime Gray Navarro Sologuren Paredes Gray, Lima jgray@navarrolegal. com

Portugal

Housing

Albano Sarmento Barrocas Sarmento Neves asarmento@ barrocas.com.pt

2006 and 2007’s continuous growth between 10 and 15 per cent turned to a decrease of three to five per cent in 2008 and expected in 2009. A strong public investment project in housing rehabilitation is expected to turn things around in late 2009 and 2010. Buildings (non-housing) Again, a two to three per cent decrease is expected in private investment (tourism and commerce). A strong investment in public buildings rehabilitation and renewal (public schools and courts) is expected to create a five per cent increase in the second half of 2009. Infrastructure (Public and PPP) Again, a strong public and PPP investment project (TGV, highways, energy) is expected to increase the market by seven per cent from 2009 onwards. Singapore

A ‘resilience package’ of S$20 billion (US$12.9 billion) has been announced. The package will focus on road, rail and health as well as accelerating smaller value government contracts worth up to S$50 million that were deferred to avoid overheating the construction sector in 2007–2008.

Construction Law International Volume 4 No 2 June 2009

Pinsent Masons

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from icp-net Slovenia

Committed public works contracts are continuing, though delays are now increasingly possible and may already be seen in some cases. There are ideas from the government for the promotion of public and private construction works to encourage the growth of the economy. Payment deadlines have been prolonged and payment discipline has decreased. Banking terms have become stricter (including more collateral being required). Many of the smaller (sub)contractors are experiencing financial difficulties and some have become insolvent. Sale of real estate (also newly built) has decreased considerably. A stricter control (financial and other) has been imposed over the construction sector by the government. Unemployment in the sector has increased and the number of available working permits for foreign construction workers has been reduced.

Odvetniki Dolžan Vidmar & Zemljarič [email protected]

Thailand

Significant impact is starting to be felt across the market. Private developers are facing difficulties with condominium and housing projects, particularly in major resorts (Phuket, Pattaya, Samui, etc) which depend on foreign buyers. Government announcements of infrastructure spending have yet to lead to major new projects, while state enterprises are reportedly scaling back investment plans. The Thai Contractors Association forecasts that construction spending may fall by half this year (up to 65 per cent in the private sector) and also reports that significant numbers of contractors are going out of business.

Alastair Henderson Herbert Smith LLP, Bangkok alastair.henderson@ herbertsmith.com

UAE

Construction projects have a particular noise. There is no hum anymore. Cranes have come to a standstill and it seems as if someone has switched the main supply off. A large number of projects in Dubai have come to a standstill and those active ones are on a drip just to be kept alive. It seems like new buzz words have emerged: ‘cancellation/on hold’. Published but unverified lists count hundreds of projects that have been either put on hold or cancelled. Further observations indicate that clients and contractors are looking for open doors to get out of projects and are trying to recover every available penny of their entitlements. The question: could this economic crisis have been foreseen and, if so, how would contracting parties have made provision for this risk? This is a question that many people will be seeking answers to for a long time to come, but we have to recognise that, looking at a normal economic cycle, this downturn was extremely radical and occurred in a very short timeframe.

Eben Snyman eben_snyman@ law.co.za

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Construction Law International Volume 4 No 2 June 2009

UK

The UK construction industry has been affected very severely by the economic downturn. Indeed, many sectors are in crisis, with the focus now on survival. Very few new private sector commercial, retail or industrial building projects have been commenced over the past few months or are likely to get underway in 2009. The major real estate developers have all announced the suspension of their development portfolios until market conditions improve. House building is at its lowest level since the 1920s, largely driven by a mortgage famine, triggered by the collapse of inter-bank lending, and a 20 per cent fall in house prices. During the last major downturn in the UK in the early 1990s, mortgage approvals fell by 57 per cent over 4.5 years – this time around, they have dropped by more than 75 per cent in less than two years. Both property companies and construction companies have been forced to make massive write-offs, with house building companies particularly badly hit. Share prices have tumbled, and many smaller building firms have gone out of business (allegedly about eight per day). This has in turn affected the building materials sector. Some companies have been left with large stockpiles and so have been forced to mothball their plants. All of this has resulted in widespread job losses across the construction industry, with many of the Polish and other EU workers who migrated to the UK during the boom years returning to their home countries. The UK Government and the Bank of England have responded in a number of ways. On a macro level, these have included the partial nationalisation of several major banks, a temporary cut in VAT, successive reductions in interest rates (currently at 0.5 per cent, at their lowest ever), and various attempts to pump money into the economy including, most recently, ‘quantitative easing’ (ie, printing more money). It is unclear how many generations it will take to pay back all the extra government borrowing involved. There has been little assistance targeted specifically at the construction industry, although the government is directing the banks which it now controls to increase their mortgage lending, and it has also unveiled plans for a £13 billion cash injection to fund certain public sector projects, including PFI projects, the M25 motorway widening programme and the 2012 Olympics. (Actual public sector spending has, however, been sluggish, and there is concern about planned projects in other areas such as the further education sector.) The government also wishes to speed up the planning and approval process for new nuclear power plants. The downturn has obviously put in jeopardy the government’s ambitious plans to see more than three million new homes built by 2020. Government policy objectives such as zero carbon homes, new affordable housing and community infrastructure projects, which were to be funded by private builders, are also under threat. UK analysts are currently suggesting that both house prices and construction costs will continue to fall for the remainder of 2009 and early 2010, probably by another 10–15 per cent, before starting to recover in 2011, although it is then likely to take several years before they return to early 2008 levels.

Construction Law International Volume 4 No 2 June 2009

Martin Bridgewater Herbert Smith LLP, London, England martin.bridgewater@ herbertsmith.com

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from icp-net Time-bar clauses versus mandatory limitation laws Natalie Matharu Corbett & Co International Construction Lawyers Ltd, London

On 15 December 2008, Edward Corbett posted the following question on ICP-Net: ‘Can anyone tell me about jurisdictions in which a notice clause may be struck down as offending mandatory limitation law? I understand that in some jurisdictions it is possible to argue that a 28 day time limit cannot be imposed to bar a claim that the law permits to be pursued any time up to, say, 10 years from the cause of action.’ It is common for parties entering into a construction contract to incorporate a notice clause. Edward made reference to the usual provision for a 28 day time limit seen in many standard forms of construction contract such as clause 20.1 of the FIDIC ‘Red Book’. Replies were received from ICP colleagues from Brazil, Dubai, France, Germany, India, Nigeria, Portugal and the United States. Sumeet Kachwaha explained that, under Indian law, an agreement which provides for restricting rights under or in respect of any contract or which purports to extinguish rights or discharge parties from any liability under or in respect of any contract on the expiry of a specified period, so as to restrict any party from enforcing its rights, is void to that extent. Also from the Indian perspective, Rajiv Luthra pointed out that a clause in a contract that prescribes a shorter period for filing a claim may be struck down by reason of violating section 28 of the Indian Contract Act 1872 (as amended in 1997). He also mentioned that, prior to the 1997 amendments, the Supreme Court in India distinguished agreements 42

with time-bar clauses reducing the three year limitation period, from agreements providing rights for forfeiture if no suit was brought within a specified period. The latter category was held not to violate the Indian Contract Act. He noted that several Indian High Courts interpreting the amended section 28 have held that this distinction of agreements would no longer hold good. Donald Gavin stated that, in the USA, under the US Federal Government contract law, construction claims asserted under the Contract Disputes Act 1978 will generally not be barred simply because a short notice period found in the contract had not been strictly complied with, provided the Government had actual or constructive knowledge of the events and that there is no significant prejudice to the Government. C Chakradaran referred to insurance contracts in Dubai and said that the courts will not allow the insurer to rely on a failure to give notice of claim to repudiate ‘an otherwise valid claim’. Julio Cesar Bueno submitted that, in Brazil, the statute of limitations should follow as a minimum requirement and, although the limitation period is capable of being extended by agreement, the limitation period can never be reduced. Despite this, he said that such notice clauses are used in Brazil in respect of Dispute Adjudication Board and Combined Dispute Board proceedings and, to his knowledge, have never been challenged in the Brazilian judicial system. Dr Stefan Osing referred to the German Civil Code’s section 309 nr. 8ee (which applies only to noncommercial contracts), rendering general terms and conditions invalid if they demand a notice period for ‘not obvious defects’ of less than one year starting at the end of the year the defect is detected. He said that for general terms and conditions which apply

to commercial construction contracts, the German Federal High Court is of the opinion that a notice period of two weeks is invalid, although he advised that the Federal High Court has not indicated what notice period would be valid. He said that the courts consider that post-handover there is no need to ‘hurry’ and therefore there is no need for a shorter notice period. He suggested that the Federal High Court may consider the position differently for pre-handover construction works as it could be argued that the owner is obliged to undertake constant reviews of the site and report defects on a short term basis as the works continue. José Filipe Abecasis reported that, in Portugal, controversy exists between jurisprudence and doctrine as to the mandatory nature of legal provisions setting the term in which to pursue a claim for defective construction works. Article 1225 of the Civil Code provides a five year limitation period. One view is that Article 1225 is mandatory as it safeguards the public interest in the soundness of buildings and therefore sets a public order principle that may not be waived by agreement. Underlying this view of the mandatory nature of Article 1225 is the need to defend the more technically disabled party in the works contract (the Owner of Works) to provide a reasonable term for detection of hidden defects and to submit a claim for remedy. The opposing view is that the term to submit a claim for defective construction works is an expiry provision which may be set aside by parties to a contract unless an express provision prevents the parties from doing so under Article 330 of the Civil Code; therefore, if Article 1225 expressly does not qualify as a mandatory provision, it may be set aside. In Nigeria, there does not seem to be any court decision on the issue of notice clauses restricting statutory limitation periods.

Construction Law International Volume 4 No 2 June 2009

Adebayo Oriola expressed the view that the courts enforce terms which have been agreed between the parties unless they are contrary to public policy or unconscionable. Nigeria has a statute of limitations that cannot be extended. However, he suggested that restrictions on the limitation period in notice provisions may depend on how the contractual provision is framed and the interpretation placed on it by the courts. From France, Marc Frilet said that enforcement of a short notice clause used to be permissible in principle but that it depended in practice upon the circumstances of the case and a consideration of reasonableness and good faith. The new article 2254 §1 of the Civil Code (effective from 17 June 2008) does permit a reduction in the limitation period by agreement to a minimum of one year although exceptions do apply (for example, for claims for payment made annually or with a term shorter than one year). He suggested that, in international contracts, the

scope of the mandatory law may lead to some debate as a distinction may be drawn between the provision of international and internal public order. An extra complicating factor was put forward to the debate by Philip Britton who submitted that timelimit rules may be classed as procedural (that is, governed by the law of the forum) rather than substantive (that is, governed by the law of the contract) and that individual legal systems’ rules of private international law may differ on how this distinction is drawn. Some legal systems regard prescription as extinguishing the right, rather than merely a remedy for breach of a right; and some regard time limits as an expression of public policy and perhaps always applicable of that law is the governing law of the contract. The forum’s own choice-of-law rules, he said, may provide that the governing law’s rule on limitation apply which may include any rules it has which prevent the parties agreeing a shorter period for

claims than what would otherwise be the (more generous) norm. Philip noted that the Foreign Limitation Periods Act 1984 directs the courts of England and Wales to treat limitations as substantive. Moreover, Article 10 of the 1980 Rome Convention on Choice of Law in Contract (in force in all EC Member States) defines the scope of applicable law and once identified short circuits most arguments on the substance/procedure distinction. Likewise, article 12 of the 2008 ‘Rome I’ Regulation (replacing the Rome Convention in all member states except the UK and Denmark) does the same but with no opt out provision as does article 15 of the 2007 ‘Rome II’ Regulation in relation to choice of law for non-contractual obligations (applying to all EC member states except Denmark). Philip suggested that these issues may have some relevance to contractual alternative dispute resolution depending on how the law to be applied is defined.

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