Country updates – Construction Law International – June 2020

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Italy

Contractor’s liability under Article 1669 of the Italian Civil Code

Cesare Caracciolo
Milan

 

The Italian Joint Chambers of the Supreme Court of Cassation (Corte di Cassazione a Sezioni Unite or the ‘Joint Chambers’) has, with the important Decision No 7756 of 27 March 2017 (L.L. and others v Company P.F. E C. s.n.c. and others) provided clarity on one of the key points of contention concerning the application of Article 1669 of the Italian Civil Code: whether the contractor’s liability under this provision includes renovation works as opposed to the construction of new buildings only.

According to Article 1669, a contractor will be held liable for total or partial collapse of a building, evident danger of collapse or serious defects in the construction. The contractor’s responsibility extends for a period of ten years from the date of completion of the works. Any defective work should be contested formally by the client and notified to the contractor within one year of discovering the defect. Article 1999, paragraph 2 of the Civil Code stipulates that the client then has one year from the time the contractor receives the notice of default to start legal proceedings against the contractor.

Article 1669 differs from the contractor’s general liability as set out in Articles 1667 and 1668 of the Civil Code, which relates to defects in the work that must be notified to the contractor within 60 days of their discovery.

Article 1669 – unlike Articles 1667 and 1668 – provides for a particular form of contractor liability for serious defects, which can only be applied in cases of total or partial collapse and long-term defects of property. This liability applies for a longer term (ten years from the completion of the work) in favour of the client and their assignees.

The rationale for Article 1669 is that in the case of real estate projects that by their nature are destined for long-term use, the correct execution by the contractor can only be confirmed with the passage of time, as problems can occur after a longer period subsequent to delivery.

As will be explained, the jurisprudence related to Article 1669 includes Decision No 7756 of the Joint Chambers, which defines the objective scope of the provision and in particular the concept of ‘work’ as used in this article.

The question that came to the attention of the Joint Chambers in this case was whether Article 1669 was applicable to defects in new buildings only or also in the renovation or refurbishment of existing buildings.

As will be explained, the answer in the few court cases addressing this issue had been negative until recently, when the Italian Supreme Court of Cassation challenged the assumption and referred the question, as a matter of particular importance, to the Joint Chambers.

According to the more restrictive interpretation of Article 1669 in the previous decisions, renovation works of existing buildings are excluded from its application. According to the broader interpretation, renovation is included in the notion of ‘work’.

Given this discrepancy in interpreting Article 1669, it had become crucial for the Joint Chambers to offer guidance on whether contractors could be held responsible for the total or partial collapse, evident danger of collapse or serious defects in construction of only new buildings or also the renovation of existing buildings.

Notable Supreme Court cases concerning Article 1669

Before Decision No 7756, the Supreme Court of Cassation had considered the scope and application of Article 1669 in several notable decisions.

In Decision No 24143 of 20 November 2007 (Cass No 24143/2007) regarding defective terrace waterproofing as part of the renovation of an existing building, the Supreme Court validated the restrictive interpretation of Article 1669. It stated that the responsibility of the contractor for serious defects in the construction only applies to new buildings. The Supreme Court reached this conclusion on the basis of a strict reading of the text of Article 1669, which links the term ‘work’ to ‘buildings or other real estate property, intended for their long-term nature’, concluding that Article 1669 applies to only the total or partial construction of a new building (including in the case of the expansion of a building) and consequently excludes mere repair or renovation of an existing building.

The Supreme Court reached the same conclusion in a similar case (Cass No 10658/2015) concerning the renovation of an existing building that had resulted in serious cracks in the structure. The decision was taken on the basis of different arguments from the previous case, but reached the same result.

More recently, Decision No 22553 of 4 November 2015 (Cass No 22553/15) reconsidered the Supreme Court’s earlier ruling. It analysed different criteria regarding the applicability of Article 1669 and applied a less restrictive interpretation. The Court concluded that the responsibility of the contractor for the total or partial collapse, evident danger of collapse or serious construction defects applies also to renovation works carried out on a
pre-existing building when the works affected the essential elements of the property or secondary elements that are relevant for overall functionality, for example, strengthening of the floors and stairs of a condominium building.

Decision No 7756

In Decision No 7756, the Supreme Court, when sitting in the Joint Chambers in its role as interpreter of the law where conflicting precedents exist, outlined the different interpretations followed in previous decisions with respect to the applicability of Article 1669.

In its innovative decision, the Court revised the application of this provision, clarifying that a contractor is liable for renovation works, as well as new construction.

The arguments on which the Joint Chambers based its decision are as follows. In setting out the introductory framework to its interpretation of Article 1669, the Joint Chambers observed how the renovation of existing buildings is compatible with all three situations mentioned in Article 1669: ‘collapse in whole or in part’, ‘evident danger of collapse’ and ‘serious defects’. In fact, restoration work can cause – both in the restored part of the structure and in adjacent parts of the structure – collapse or danger of collapse. However, the decision recognises that this is mainly the case in circumstances where ‘serious defects’ affect the renovation works of existing buildings (eg, defects in sealing, cladding and fixtures). Accordingly, the Supreme Court underlined how, while the contractor’s liability for collapse or partial collapse of new buildings is intended to protect the client’s – and the public’s – interest in the soundness of the structure, the contractor’s liability for serious defects in renovation works of existing buildings is intended to protect the client’s interest in the enjoyment of the property for its intended use. The Supreme Court observed that, in the case of serious defect, it does not make any difference whether the defect affects a new structure or renovated structure.

The Joint Chambers then observed that this interpretation is confirmed by the historical evolution of Article 1669. Article 1792 of the Napoleonic Code provided for the ten-year liability of the contractor only in the case where the building ‘périt en tout ou en partie’, that is, in case of partial or total collapse. Article 1639 of the Italian Civil Code of 1865 (derived from the Napoleonic Code) added the situation of danger of collapse, expanding the liability of the contractor to circumstances where, in the ten years from the completion of the construction of a building or other notable work, ‘one or the other collapse in whole or in part, or presents evident risk of collapse’. There was a further and conscious step forward with the addition of serious defects related to renovation works of existing buildings to the provision of the Civil Code, which diverts the focus from the completion of the work to its subsequent use and enjoyment, including defects that affect its functionality, even without compromising the safety and stability of the property.

Moreover, the change in the subject of the provision, from ‘building’ in the Civil Code of 1865 to ‘work’ in the current Article 1669, is significant: the Supreme Court observed how such a change would have a semantic reason only if, by ‘work’, the provision does not mean the building itself, but ‘the building activity’ that is the object of the contractor’s obligation, which can be both the construction of a new building as well as the renovation of a pre-existing one.

The Joint Chambers also stressed that, on a logical and substantial level of justice, adherence to the restrictive interpretation of Article 1669 would be irrational and not in conformity with a constitutionally orientated interpretation. To interpret the provision strictly would be to treat the initial construction of a building differently to its renovation, when in fact both could result in serious damage to the client.

In light of these considerations, the Joint Chambers determined that the limitation of the meaning of the term ‘work’ to that of ‘construction of a new building’
(ie, excluding renovation works) is not justified.

Conclusion

In conclusion, the Joint Chambers, accepting the appeal and resolving the jurisprudential conflict, affirmed the principle that:

‘Article 1669 c.c., given all the other conditions, is applicable also to building renovation works and, in general, to maintenance or long-term modifications to pre-existing buildings, which [collapse or] present [obvious danger of collapse or] serious defects that affect the enjoyment and on the normal use of the property, according to its own destination.’

Based on this decision, arguments put forward to support the more restrictive interpretation of Article 1669 do not appear to be endorsed by the Joint Chambers. In particular, the Joint Chambers does not appear to accept the alleged exceptionality of Article 1669 with the consequent prohibition of analogy to circumstances not specifically named in the provision.

 

Cesare Caracciolo is a lawyer in Milan. He can be contacted at avvcaracciolo@libero.it

 


 

 

Panama

Panama’s new public–private partnership regime

Luis H Moreno IV
Panama City

 

Panama has adopted its first public–private partnership (PPP) regime through Law 93 of 2019 (the ‘Law’). It regulates the institutional framework and processes for the development of investment projects in the PPP category, seeking to promote the development of infrastructure and public services, contribute to economic growth, job creation and competitiveness, and to improve the living conditions of the people.

Facing fiscal constraints, and in some cases technical limitations, Panama anticipates benefitting from this initiative by attracting private-sector experience, investment and financing for the development of important projects.

With a few exceptions, the Law is applicable to the central government, autonomous and semi-autonomous entities of the non-financial public sector, municipalities and business corporations in which the state has a majority stake.

It incorporates strong mandatory principles applicable across PPP projects, including transparency, budgetary capacity, appropriate risk allocation, fair competition and integrity. It also includes eligibility factors that will determine the convenience of implementing a given project through the PPP regime. These factors include a general social analysis that should indicate the benefits of the project to the population; a cost–benefit analysis that would determine the convenience of undertaking the project under the PPP regime versus the traditional public procurement or concession method; a risk distribution proposal including construction, financial, commercial and other risks throughout the different project stages; sustainability and feasibility studies; and legal and environmental analysis.

The scope of work for a PPP project may include design, construction, reparation, financing, expansion, exploitation, operation, maintenance, administration and supply of goods or services to the contracting public entity or to the end users of any public service.

Institutional framework

The governing body, the Ente Rector, consists of the Ministers of the Presidency, Economy and Finance, Public Works, Commerce and Industry, and Foreign Affairs, as well as the Comptroller General of the Republic, who does not have the right to vote.

The Ente Rector is the highest authority in PPP projects. Its responsibilities include:

• defining the priority areas of PPP projects;

• carrying out analysis on the identification, selection and prioritisation of PPP projects;

• approving requests by contracting public entities to undertake projects under the PPP regime;

• approving rules and guidelines for risk allocation;

• approving the scope of work proposed by contracting public entities and the content of PPP agreements; and

• authorising modifications to the tender documents and PPP agreements.

The Law also created the PPP National Directorate (the ‘Directorate’). It acts as a technical and operational support unit for the Ente Rector, preparing for its consideration and approval:

• the selection criteria for PPP projects;

• the standardisation of processes;

• the protocols for collaboration between the various institutions involved in the development process of PPP projects;

• guidelines for risk allocation; and

• the design of the scope of work and PPP agreements, in compliance with the provisions established in the Law.

The Directorate also acts as liaison between the Ente Rector, the contracting public entities and the Advisory Committee.

The Advisory Committee is made up of four members of Panama’s private sector, two members of the academic and teaching sector and two members of the organised groups of workers. It raises recommendations and proposes PPP projects to the Ente Rector through the Directorate.

The Ministry of Economy and Finance plays an important role in the implementation of PPP projects as it must coordinate, in accordance with its Budget Classifications Manual of Public Expenditure, the methodology that will be applied to assess the impact of the project on the specific public expenditure of the contracting public entity and the government’s general budget during the term of the PPP agreement.

The tender process

The tender documents are made public through a publicly accessible website with sufficient time for review by interested parties. The publication will include the date of a homologation meeting where all interested parties may discuss the tender documents with the contracting public entity. Also, the publication will include the date, place and time for the bid proposal submission.

Once the contracting public entity receives the proposals from the bidders, it will verify that all the minimum technical, administrative and financial requirements established in the tender documents have been met and then apply the corresponding quantifiable objective valuation method for the economic proposal, as indicated in the tender documents.

The awarded bidder must create a local special purpose vehicle, which will be the actual contractor and will sign the PPP agreement, provide it with the required capital as indicated in the tender document and submit a performance bond. The PPP agreement will enter into effect only after the Comptroller General provides its countersignature to the agreement.

Legal recourses are available for any bidders who argue that their rights were not respected during the tender process.

PPP agreement

The maximum term for PPP agreements is 30 years, with a possible extension of up to 10 years. The Law recognises the possibility of further extensions (up to five years), due to delays attributable to the contracting public entity.

All PPP projects must be at least US$15m, except for PPP projects undertaken by municipalities, which will be subject to what the regulation of the Law establishes.

The Law classifies PPP projects as ‘self-sustaining projects’ (entirely financed by the fees and tolls paid by end users) and ‘co-financed projects’ (requiring or potentially requiring financial contributions from the contracting public entity), depending on the financial commitments assumed by the contracting public entity. In co-financed projects the contracting public entity will assume fixed or contingent commitments, as determined in the corresponding tender documents of the given project.

It is worth mentioning that although constitutionally the Panamanian budget is determined annually by a law approved by the National Assembly, the Law requires that all co-financed PPP agreements contain a provision that obligates the contracting public entity to include the financial resources allocated to pay the PPP contractor in the budgets of the next fiscal periods.

Also, the Law establishes that the Ministry of Economy and Finance will honour the financial obligations acquired by the contracting public entities in PPP agreements and will prioritise the projects in execution.

Dispute resolution mechanisms are contemplated in the Law, starting with an initial stage of direct negotiation to allow a friendly and direct solution between the contracting parties, if applicable. If a friendly solution is not reached between the parties, the technical and/or economic disputes may be submitted for consideration by a technical panel of professionals with outstanding experience in the technical, economic and legal matters of the infrastructure concessions sector. The technical panel will consist of two lawyers, two engineers and a professional specialised in economic or financial sciences. The technical panel will issue an expedited technical recommendation that will not be binding on the parties but may be further considered as evidence by an arbitral tribunal.

All PPP agreements will include arbitration clauses and will establish the regulations applicable to the arbitration proceeding. The applicable law shall be that of the Republic of Panama and the seat of the arbitration will be the Republic of Panama.

The Law also includes ‘step-in rights’ for creditors to replace the PPP contractor in all its rights and obligations under the PPP agreement if the PPP contractor is in breach of its obligations under the PPP agreement.

In the same vein, the Law enables the holding company of the PPP agreement to transfer the PPP agreement or its rights under the PPP agreement, but in order to do so, it must first get authorisation from the Ente Rector. Without prior authorisation, no transfer may take place.

Additionally, the Law creates a special pledge in favour of the creditors, which may be agreed between the holding company of the PPP agreement and its creditors. This special pledge may include the rights of the holding company of the PPP agreement, payments of the contracting public entity to the holding company of the PPP agreement and, in general, all receivables of the holding company of the PPP agreement.

Relevant projects

The Panamanian government has publicly referred to a pipeline of projects to be developed under the new PPP regime surpassing US$2bn. Among the anticipated projects, the government has mentioned: (1) the construction of an 8km cable car system (San Miguelito Metrocable), with seven stations, transporting up to 3,000 passengers an hour, that will cross six municipalities and connect with Panama’s two existing metro lines; (2) the construction of a 24km highway (La Costanera highway), connecting the Arraiján-La Chorrera highway to the neighbourhood of Panama Pacifico; and (3) the rehabilitation of an approximately 185km section of the Pan-American highway of between the cities of Santiago and David.

 

Luis H Moreno IV is an attorney at Alfaro, Ferrer & Ramirez in Panama City. He can be contacted at lhmoreno@afra.com.

 


 

 

 

Ukraine

Changes to Ukrainian national legislation in 2018 and steps towards harmonisation with European Union legislation

Anastasiya Bidakh
Kiev

 

The year 2018 was replete with legislative changes in the construction industry in Ukraine. Not all of these changes are of fundamental importance, but many of them are influencing the development of the market.

 

Update on state construction norms

The integration of Ukraine into the European Union has initiated the revision of construction standards to bring them into greater harmony with European codes and standards.

In Ukraine, state construction norms (SCN) regulate the construction industry, including products, processes and services in the field of urban planning, as well as the organisation, technology, management and economics of construction. Most of the existing SCN are outdated and do not meet modern requirements for technology and safety and therefore need to be updated or replaced.

Updates to certain SCN were an important event for the Ukrainian construction industry in 2018. In particular, the updates to the following SCNs were significant: B.2.2-12:2018 ‘Planning and development of territories’; B.2.2-4:201X ‘Houses and buildings. Pre-school educational institutions’; B.2.2-3:201X ‘Houses and buildings. Educational institutions’; B.2.3-5:20XX ‘Streets and roads of settlements’; and B.2.2-40:2018 ‘Inclusiveness of buildings and structures’.

The basic SCN B.2.2-12:2018 ‘Planning and development of territories’, approved by Order of the Ministry of Regional Development, Construction, Housing and Communal Services of Ukraine No 100, dated 23 April 2018 (‘Order No 100’), was subject to the most negotiation.

SCN B.2.2-12:2018 regulates the planning and development of territories, transport infrastructure and industrial zones, including the introduction of new altitude restriction lines, the development of green areas, development restrictions for safe evacuation, limitation of the construction density and number of storeys and the like.

Despite the positive nature of the updates to SCN B.2.2-12:2018, some developers sought to prevent these changes from taking effect by filing court claims seeking a declaration that these changes were unlawful and seeking cancellation of Order No 100. These claims have created a situation of uncertainty in the construction industry. On the one hand, when designing construction projects the updated SCN B.2.2-12:2018 should apply. On the other, there is a risk that this SCN will be cancelled. Order No 100 has been suspended and then cancelled by court decision. As of the date of this article, no final judgment has been issued. However, on 1 October 2019 a new SCN B.2.2-12:2019 was  approved cancelling B.2.2-12:2018.

Harmonisation of Ukrainian legislation with EU legislation

In 2018, legal acts and regulations were adopted that aimed to harmonise the legislation of Ukraine with the legislation of the EU. The main changes include:

• Pursuant to the Law of Ukraine on the Energy Efficiency of Buildings, with effect from 23 July 2018, construction projects (in the medium (CC2) and high (CC3) consequences categories),1 as well as certain existing buildings, are subject to mandatory certification of energy efficiency. Certification of energy efficiency is issued only by a certified energy auditor upon the owner’s request and at the owner’s expense. An energy certificate is valid for ten years.

• The Law of Ukraine on the Strategic Environmental Assessment became effective on 12 October 2018. The goal of the strategic environmental assessment is to promote sustainable development by ensuring environmental protection and the health and safety of the population, and integrating environmental requirements into the development and approval of state planning documents, including urban planning documentation.

• The Decree of the Cabinet of Ministers of Ukraine No 229 dated 28 March 2018 amended paragraph 3 of the ‘Procedure for the application of construction norms developed on the basis of national technological traditions and construction standards harmonised with the regulations of the European Union’.2 The amendment set out in the Decree removes design restrictions for CC3 construction projects prohibiting the use of modern Eurocodes during the design of these projects. The restriction was established under the original Procedure because not all relevant Eurocodes had become effective in Ukraine. At present, all Eurocodes have entered into force in Ukraine. Therefore, the implementation of the regulation will allow for the expansion of the scope of SCN developed on the basis of the harmonisation of national technological traditions with EU regulations for construction projects, regardless of classification.

Other changes in the construction industry

On 9 November 2018, criteria were approved for assessing the degree of risk to a business in the field of town planning and for determining how often a construction project would be subject to state supervision by the authorised architectural and construction control bodies.