Introduction
A construction contract is the agreement by which the contractor undertakes, otherwise than under a contract of employment, to produce a work of a tangible nature in return for a price to be paid by the client (Section 7:750 of the Dutch Civil Code (DCC)). Building projects involve large sums and long timelines; the quality of the arrangements shows above all when things go wrong, in the event of delay, defects or a dispute over additional work. This page works through the elements of the agreement and considers, for each provision, how it plays out when the parties fall into disagreement.
The structure of the agreement
The agreement follows the life cycle of the works: first who the parties are and what is to be built, then the price and the handling of changes, next the performance and completion, and finally liability, security and dispute resolution. The full structure may look as follows:
- Heading: title, parties and recitals
- Definitions and interpretation
- The works
- Applicable conditions (UAV 2012 / UAV-GC)
- Contract price
- Additional and reduced work
- Programme and completion date
- Performance, supervision and inspection
- The contractor's duty to warn
- Completion
- Defects and liability after completion
- Payment and instalments
- Security
- Penalty for late completion
- Liability
- Insurance
- Disputes, choice of law and forum
- Annexes: specifications, drawings and programme
Heading: title, parties and recitals
The agreement opens with the title, the parties, client and contractor, and the recitals, which describe the works and the background. The recitals create no independent obligations, but assist in interpreting the agreement under the Haviltex standard.
Example recitals +
The undersigned: (1) [Client];
and (2) [Contractor];
whereas the Client wishes to have [the works] realised and the Contractor is willing to carry this out in accordance with the Specifications and the Drawings, have agreed as follows:
For the client, a precise description of the works in the recitals is important; the contractor takes care that only the agreed specifications, and not later wishes, are counted as part of the works.
Definitions and interpretation
The defined terms and the order of precedence of the documents. In construction contracts that order of precedence is crucial: the specifications, drawings, programme and general terms and conditions may contradict one another.
Example definitions +
In the event of any conflict between the contract documents, the following order of precedence applies: (1) this agreement;
(2) the Specifications;
(3) the Drawings;
(4) the applicable conditions.
The client stipulates that the more specific documents take precedence; the contractor, by contrast, wants its general terms and conditions and assumptions to prevail in cases of ambiguity.
The works
The description of the works determines what the contractor must deliver. It refers to the specifications and the drawings and records what is and is not included. Most construction disputes can be traced back to an unclear description of the works.
Example clause +
The Contractor shall carry out the Works as described in the Specifications and the Drawings (Annexes 1 and 2). Work not included therein does not form part of the Works, unless agreed in writing as additional work.
A broad, functional description ("ready for use") favours the client; a strict description confined to the specifications favours the contractor.
Applicable conditions (UAV 2012 / UAV-GC)
Standard conditions are often declared applicable: the UAV 2012 for a traditional specification, or the UAV-GC 2005 for integrated contracts in which the contractor also provides the design. They govern, among other things, liability, completion and dispute resolution, and supplement the agreement.
Example clause +
The UAV 2012 apply to this agreement. In the event of any conflict between the UAV 2012 and this agreement, the provisions of this agreement shall prevail.
The choice of conditions, and any departures from them, allocate risks tacitly: the client watches the liability and defects regime in the chosen conditions, the contractor the scope for extensions of time and cost increases.
Contract price
The price may be fixed (a lump-sum contract price), on a cost-plus basis (time and materials charged as incurred) or a target price with a margin. The choice allocates the risk of unforeseen setbacks.
Example clause +
The contract price amounts to EUR [amount] excluding VAT, fixed and not subject to adjustment, save for additional and reduced work agreed in writing.
A fixed contract price favours the client: the contractor bears the risk of setbacks. A cost-plus or target price favours the contractor: cost increases are passed on.
Additional and reduced work
Changes to the works give rise to additional or reduced work. The law requires the contractor to warn the client in good time of any price increase resulting from additions or changes desired by the client, unless the client ought to have understood that necessity itself (Section 7:755 DCC).
Example clause +
Additional work is carried out only upon written instruction, with prior notification of the consequences for the price and the completion date. The Contractor shall warn the Client in good time of any necessary price increase.
The client stipulates that additional work is payable only following a written price quotation; the contractor also wants to be paid for additional work instructed orally or that is necessary.
Programme and completion date
The programme records the start, the interim milestones and the completion date, together with the grounds for an extension of time (for example frost, data supplied late, or additional work).
Example clause +
The Works shall be completed no later than [date]. The Contractor is entitled to an extension of time in the event of circumstances not attributable to it, provided that it notifies the Client thereof in writing in good time.
A hard completion date backed by a penalty favours the client; broad, loosely defined grounds for an extension of time favour the contractor.
Performance, supervision and inspection
This provision governs how the works are carried out and monitored: the role of the supervising authority, the site meetings, the use of subcontractors and access to the works.
Example clause +
The Contractor shall carry out the Works as a competent and diligent professional. The Client, or at least the supervising authority appointed by it, shall exercise supervision and shall have access to the Works at all times.
Broad powers of instruction and supervision favour the client; the contractor ensures that such supervision does not enlarge its own responsibility and liability.
The contractor's duty to warn
The contractor must warn the client of inaccuracies in the instructions, in data, drawings or materials supplied by the client, in so far as it knew or ought to have known of them (Section 7:754 DCC). If it fails to do so, it may be liable despite an error on the client's part.
Example clause +
The Contractor shall warn the Client in writing as soon as it identifies a defect or unsuitability in the Specifications, the Drawings, the data or the materials prescribed by the Client.
The client stipulates a broad, explicit duty to warn; the contractor limits it to what it could reasonably have noticed.
Completion
Completion is the moment at which the works are accepted as finished. From acceptance the risk passes and the maintenance and warranty period usually begins. The works are deemed completed once the client has accepted them (Section 7:758 DCC); minor defects do not stand in the way of completion, but are recorded on a list.
Example clause +
On completion, a completion report (proces-verbaal) is drawn up with a list of defects still to be remedied. Acceptance, whether or not subject to a reservation in respect of those defects, constitutes completion.
The client wants scope to refuse completion in the event of defects and to suspend part of the payment; the contractor wants minor defects not to hold up completion, and hence payment.
Defects and liability after completion
After completion, the contractor is released from liability for defects which the client ought reasonably to have discovered at that time; for hidden defects it remains liable (Section 7:758(3) DCC). The agreement governs the maintenance period and the warranties.
Example clause +
During a maintenance period of [x] months after completion, the Contractor shall, on first notice, remedy the defects that come to light after completion and that are attributable to it.
A long maintenance and warranty period with broad cover favours the client; a short period and a narrow definition of "hidden defect" favour the contractor.
Payment and instalments
The price is often paid in instalments linked to the progress of the works. A final instalment is usually paid only after completion and the remedying of the defects list.
Example clause +
The contract price is paid in instalments in proportion to progress. The final instalment ([x]%) is due after completion and the remedying of the defects recorded in the completion report.
Payment in arrears, linked to progress and remedying, favours the client; payment in advance or at the start of each phase favours the contractor.
Security
Both parties may require security: the client a bank guarantee or the retention of part of the price; the contractor a payment guarantee. In the case of a dwelling for a consumer, the client may hold up to 5% of the contract price in escrow with the civil-law notary instead of paying it (Section 7:768 DCC). The contractor may exercise a right of retention.
Example clause +
At the outset, the Contractor shall provide a bank guarantee of [x]% of the contract price, valid until the end of the maintenance period. The Client is entitled to hold the final 5% of the contract price in escrow in accordance with Section 7:768 DCC.
A generous bank guarantee and a retention deposit favour the client; a payment guarantee and a right of retention over the works favour the contractor.
Penalty for late completion
Where the completion date is exceeded, a deduction (penalty) per day is often stipulated. The court may reduce a penalty where it leads to a manifestly excessive result (Section 6:94 DCC).
Example clause +
Where the completion date is exceeded, the Contractor shall forfeit an immediately payable deduction of EUR [amount] per workable day, subject to a maximum of [x]% of the contract price.
A high daily deduction with no cap favours the client; a capped deduction that serves as the sole compensation for delay favours the contractor.
Liability
The contractor's liability for loss is often limited: to an amount, to direct loss, or to the cover provided by the insurance. Such limitations are not always accepted in the case law.
Example clause +
The Contractor's liability is limited to the amount paid out under the insurance in the case concerned, or, failing that, to [amount];
consequential loss is excluded, save in the case of intent or wilful recklessness.
Broad liability without limitation favours the client; a cap, the exclusion of consequential loss and a link to the insurance cover favour the contractor.
Insurance
For building projects, a CAR insurance policy (Construction All Risks) is usually taken out, covering loss to the works and to third parties during construction and the maintenance period.
Example clause +
The Contractor shall take out a CAR insurance policy covering the Works, liability towards third parties and the maintenance period, and shall provide the policy schedule to the Client on request.
The client stipulates that it counts as a co-insured party and that the cover is adequate; the contractor wants to keep the premium burden and the excess manageable.
Disputes, choice of law and forum
Construction disputes are traditionally submitted to the Arbitration Board for the Building Industry (Raad van Arbitrage in bouwgeschillen), which has technical building expertise; the parties may also opt for the state courts. Dutch law applies to the agreement.
Example clause +
Disputes shall be settled by the Arbitration Board for the Building Industry in accordance with its rules, or, if the parties so agree, by the competent court in [place].
Arbitration before the Arbitration Board offers technical building expertise and speed; the state courts are public and generally cheaper. The choice is a deliberate trade-off.
Annexes
The substance of the works is largely set out in the annexes: the specifications, the drawings and the programme to which the agreement refers. They deserve the same attention as the main text, because they determine what the contractor must deliver.
Example clause +
Annex 1: Specifications · Annex 2: Drawings · Annex 3: Programme · Annex 4: Applicable conditions.
What does this mean in a dispute?
Most construction disputes arise over additional work, delay and defects at or after completion. An agreement with a clear description of the works, a tight procedure for additional work and a clear regime for completion and defects limits that risk. If matters nonetheless end in proceedings, the agreement touches on the field of real estate and construction law.