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Whose Fault is it? The Question of Liability in Case of More Than One General Contractor

Whose Fault is it? The Question of Liability in Case of More Than One General Contractor

Hungary
Typography

This mostly occurs in the case of high volume projects where more than one general contractor performs construction work in parallel on the construction site (“multiple contractors”). It is possible to divide the tasks in a way that the contractors perform the same works but in different locations (e.g. different contractors for different buildings), while it may also happen that the client requires different contractors for different branches or distinct tasks (e.g. deep foundation phase, low voltage, BMS).

Advantages

Apparently, the advantage of engaging multiple contractors is that the different tasks between the contractors can be divided. Accordingly, even if one general contractor drops out of the construction for any reason (e.g. due to a liquidation proceeding), such outage can be remedied more efficiently compared to the case when the client loses the only contractor for the entire project. Multiple general contractors are often used, since it allows the client to have more influence on the construction timetable, the selection of the appropriate subcontractors, the quality and also the pricing of the work done.

Disadvantages

However, simultaneously engaging multiple general contractors may be difficult. The work of general contractors performed at the same time or in the same location in parallel or successively must be duly planned and harmonised, which is the responsibility of the client. The coordination of the work requires huge resources from the client. If the work of the contractors can be clearly separated in terms of location, since they work in different sites, the coordination does not have so much relevance. On the other hand, if the contractors have to perform at the same location and at the same time and/or successively, coordination is crucial.

Preparation

If multiple general contractors are working on the construction site, it is advisable for the investor or for the project manager to harmonise their contracts in order to ensure the proper allocation and documentation as to the liabilities. In addition to the generally used consequences (e.g. penalty for a delay caused by one contractor to another contractor), it may be useful to work out mechanisms that facilitate the cooperation between the contractors (e.g. exchanging information, reporting obligations, regulated cooperation). Instead of punishing, this system could work more on an incentive basis.

Proper documentation

During the project, the client, due to unexpected events, often may find himself in situations where immediate decisions are needed, that most often override the construction timetable. In case of such unexpected events, it often turns out for the client that it is not clear which contractor was in the possession of the given working area at that time and how to find the responsible contractor. In case of several general contractors, the risk of unexpected events multiplies as well: the client typically experiences that the contractors generally hold the other contractors liable for the occurred defects and unexpected events. It seems to be clear, however, that many times the proper documentation as to the significant circumstances (such as the handover of the working areas) during the construction work is missing. Furthermore, it is also crucial both for the contractor and the client to immediately communicate the defects and the relevant comments to the other party, otherwise there is a risk that the information will be lost permanently and neither party will be able to use it. As a result, it is not possible to make immediate action that could decrease the occurred additional costs and damages, and the client’s bargaining power during the settlement significantly decreases.

Accurate and continuous documentation of the process is important not only during the construction work but also after the completion of the work, when the fixable and non-fixable defects are summarized and might be needed to reduce the contractor’s fee. In case of improper documentation of defects and events, it is quite difficult to explore the responsible contractors, to establish their liability afterwards or to make deductions from the contractors’ fees. In this case, the maximum that can be done is to divide and deduct the occurred additional costs among the relevant contractors proportionately or based on an estimate.

Defects subject to guarantee

In case of multiple general contractors, the client must consider the risk that after the completion of the construction work, the contractors will hold the other contractors liable for the defects subject to guarantee and warranty and will deny their own liability. In order to decrease such risk, it is advisable to properly specify the guarantee obligations and procedures in the contract. In addition, in case of multiple general contractors, determining whether the defect existed during the construction or occurred afterwards and which contractor is liable for such defect and which contractor is liable for such defect is possible only through the proper documents.

It may occur that the client discovers further defects during the examination of the defect subject to guarantee. In this case, there is a question who is liable for the newly discovered defects and whether they can be repaired together with the original defect. The question of hidden defects in case of multiple general contractors may be extremely complicated. In this case it must be checked whether the client, during the repair work, found further defects and deficiencies in the area that had been wrapped during the construction and also whether the construction of the discovered area and the wrapping had been carried out by the same contractor. Furthermore, in connection with the discovered defect in the hidden working area it must be checked whether the contractor, before wrapping it, had ensured for the client to examine the part to be covered.

According to the above, the importance of proper documentation cannot be emphasized enough, in the possession of which the given party can be in a more favourable bargaining position during all phases of the project.

By Gabriella Galik, Partner, KCG Partners Law Firm

Hungary Knowledge Partner

Established in 1957, Wolf Theiss is one of the leading European law firms in Central, Eastern and South-Eastern Europe with a focus on international business law. With 300 lawyers in 13 offices located in Albania, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia and Ukraine, Wolf Theiss represents local and international industrial, trade and service companies, as well as banks and insurance companies. Combining law and business, Wolf Theiss develops comprehensive and constructive solutions on the basis of legal, fiscal and business know-how.

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