1 Making Construction Projects
1.1 What are the standard types of construction contract in your jurisdiction? Do you have: (i) any contracts which place both design and construction obligations upon contractors; (ii) any forms of design-only contract; and/or (iii) any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.)
When implementing a project a developer normally enters into the following agreements:
The main parties involved in a project are:
1.2 How prevalent is collaborative contracting (e.g. alliance contracting and partnering) in your jurisdiction? To the extent applicable, what forms of collaborative contracts are commonly used?
Due to regulatory requirements, it is not common for a developer to employ several contractors instead of one general contractor since, in this case, the developer takes over liability for the entire construction process and must itself hold SRO membership.
No special forms of collaborative contract with contractors have been elaborated for this case: contractors normally collaborate with the developer rather than among themselves.
If a partnership of several contractors is required, this may most likely be organised through a special purpose vehicle (SPV).
1.3 What industry standard forms of construction contract are most commonly used in your jurisdiction?
There are no Russian standard forms of contract. Major local industrial projects, particularly those financed by international banks and financial organisations, often use standard forms of contract developed by the International Federation of Consulting Engineers (Fédération Internationale Des Ingénieurs-Conseils – FIDIC). These, however, require thorough adaptation to local regulatory, reporting, tax and bookkeeping requirements, etc.
Construction contracts for international projects are usually also based on FIDIC models adapted to the Russian legislation. This applies, in particular, to infrastructure and industrial projects.
1.4 What (if any) legal requirements are there to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations are usually required)? Are there any mandatory law requirements which need to be reflected in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?
A construction agreement must be made in writing. It is theoretically possible to conclude one by exchanging offer and acceptance but this does not happen in practice.
The mandatory conditions include the subject matter of the agreement (which must be quite precisely determined) and the work performance schedule (at least the start and the end dates). The price may be set in the agreement as a fixed amount or a calculation formula.
Taking into account the latest amendments to the Russian legislation and approach taken by the courts, even if the parties have not formally determined any material condition, if a party launches performance of the agreement (including, for example, by making an advance payment or accepting it) and it is clear from its conduct that it deems the agreement concluded, that party is not entitled to refer to the agreement not having been concluded due to failure to agree upon a material condition.
1.5 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.
Non-binding letters of intent or term sheets are concluded periodically fixing the agreed key commercial terms for the period of negotiations on the contract for mid-size or large-scale projects.
Also quite widespread are so-called letters of guarantee in which the employer guarantees payment for the initial works launched by the contractor prior to the agreement being made, though enforceability of such letters is highly dubious. So, as a rule, the only contractors that agree to them are those that have long-standing positive experience of working with a particular employer or are extremely interested in obtaining the project and are prepared to assume the relevant risk.
1.6 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer's liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors’ all-risk insurance?
Insurance is usually the duty of the contractor, although it is sometimes imposed on the employer, for example, when the construction is covered under the employer’s general insurance (including international insurance coverage if the employer operates in several jurisdictions). The following types of insurance are usually maintained:
Such insurance is executed in the form of Construction All Risks insurance.
Contractor’s liability insurance must also cover their potential recourse liability toward the employer if claims are lodged against the employer by third parties in connection with harm caused to their life, health or property by damage to or destruction of the facility under construction.
1.7 Are there any statutory requirements in relation to construction contracts in terms of: (a) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (b) tax (payment of income tax of employees); and/or (c) health and safety?
Construction contracts as a rule contain general wording on observing safety requirements on the construction site and immigration legislation in relation to the contractor’s personnel since these issues are regulated by statute and are non-negotiable.
Contracts do not usually include any special conditions relating to payment of taxes with respect to the contractor’s personnel since these issues are regulated by statute and are non-negotiable.
1.8 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability period is complete?
The majority of construction contracts contain provisions on retention of part of the price by the employer. Alternatively, a retention can be replaced with a bank guarantee securing the contractor’s obligations during the warranty period. Some contracts stipulate that 50% of the retention is kept back until the end of the warranty period but, in this case, case law is not definitive and the possibility exists of the contractor recovering this sum prior to the expiry of the warranty period.
1.9 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee the contractor's performance? Are there any restrictions on the nature of such bonds? Are there any grounds on which a call on such bonds may be restrained (e.g. by interim injunction); and, if so, how often is such relief generally granted in your jurisdiction? Would such bonds typically provide for payment on demand (without pre-condition) or only upon default of the contractor?
Most contracts provide for advance payment guarantee and performance guarantee. As a rule, those guarantees are provided in the form of bank guarantees.
The law does not set any specific requirements or limitations with respect to such guarantees.
A call on a guarantee may be submitted in the event of breach of the contract by the contractor. As a rule, guarantees are unconditional and do not require any proof of the contractor’s breach to be provided to the guarantor.
1.10 Is it permissible/common for there to be company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such guarantees?
A corporate guarantee may be provided by any company (not necessarily to its subsidiary, but also to any third company). Mostly, however, corporate guarantees are granted over and above a bank guarantee, and only rarely as the sole security.
The legislation contains no specific rules or restrictions on such guarantees issued under construction contracts.
1.11 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that until, they have been paid, they retain title and the right to remove goods and materials supplied from the site?
Before and until the materials and equipment supplied by the contractor have been used in the construction they belong to the contractor and it may dispose them at its discretion.
However, once materials and equipment, whether supplied by the contractor or by the employer, are installed on the facility under construction, their fates coincide. Once materials and equipment supplied by the contractor are installed in the facility the contractor may not demand their removal, and vice versa.
Even so, if the employer delays payment under the agreement, the contractor has the general right to retain the constructed facility until the employer makes the payment, unless such a right is abolished by the contractor agreement.
2 Supervising Construction Contracts
2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party (e.g. an engineer)? Does any such third party have a duty to act impartially between the contractor and the employer? If so, what is the nature of such duty (e.g. is it absolute or qualified)? What (if any) recourse does a party to a construction contract have in the event that the third party breaches such duty?
The law obliges the employer to exercise construction supervision over performance of works by a contractor. As a rule, the employer hires a licensed engineer called the ‘technical employer’ to fulfil this function.
The technical employer does not have to be an independent expert between the employer and the contractor; instead, it operates as a professional representative of the employer on the employer’s side.
The technical employer bears liability only towards the employer/developer under the relevant contract.
2.2 Are employers free to provide in the contract that they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when paid” clause?
Such clauses are periodically included in contracts, but the contractor may challenge them in court and case law tends to be on the side of the contractor.
2.3 Are the parties free to agree in advance a fixed sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre-estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss likely to be suffered by the employer? Will the courts in your jurisdiction ever look to revise an agreed rate of liquidated damages; and, if so, in what circumstances?
The parties are free to agree a fixed sum to be paid by the contractor in the event of particular breaches (penalty). Usually contracts set different penalties for different types of breaches. The most common penalties are penalties for each day of delayed performance of the works.
The law requires that pre-agreed penalty be reasonable, and courts have the right to reduce the penalty amount if the contractor manages to prove the penalty is evidently excessive in relation to the consequences of the breach and the employer’s losses.
As a rule, contracts usually set a cap for such penalties.
By default, the employer is entitled to recover losses in the amount exceeding the penalty. The parties may, however, agree in the contract that, in this case, losses (liquidated damages) are not recoverable, or that all losses are recoverable over and above the pre-agreed penalty (penal sum).
3 Common Issues on Construction Contracts
3.1 Is the employer entitled to vary the works to be performed under the contract? Is there any limit on that right?
The employer may modify the technical assignment on the condition that the cost of the additional works does not exceed 10% of the total construction estimate and do not change the nature of the works covered by the construction agreement.
In practice, however, construction agreements with a fixed price usually exclude such a right of the employer to modify the works’ scope.
3.2 Can work be omitted from the contract? If it is omitted, can the employer carry out the omitted work himself or procure a third party to perform it?
The employer is entitled to exclude part of the works if this is allowed by the contract. In this case, the employer may perform them itself or engage a third party.
If it becomes clear during performance of the works that they will not be duly performed, the employer has the right to set the contractor a time limit for rectifying the shortcomings and, if the contractor fails to put them right, engage another contractor to do so and charge the initial contractor for this and for any losses incurred.
3.3 Are there terms which will/can be implied into a construction contract (e.g. a fitness for purpose obligation, or duty to act in good faith)?
The contractor will be charged, by default, with the fitness for purpose obligation and duty to act in good faith.
In addition, the contractor must notify the employer if circumstances arise preventing it from fulfilling the works in accordance with the contract (whether these are actual circumstances and work performance conditions or a material increase in the price of materials or equipment). If the contractor does not notify the employer of an identified need to carry out additional works, it must perform all the works within the contract price.
3.4 If the contractor is delayed by two concurrent events, one the fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an extension of time; and/or (b) the costs arising from that concurrent delay?
The legislation does not regulate this matter directly. If the parties cannot reach an agreement, the dispute is passed to a court for consideration, which will assess the contribution of each (the contractor and the employer) in that delay.
3.5 Is there a time limit beyond which the parties to a construction contract may no longer bring claims against each other? How long is that period and when does time start to run?
The general statute of limitations is three years. With respect to construction defects for which the contractor is liable, the statute of limitations runs from the time the defect is or should have been discovered.
At the same time, liability for defects is borne by default by the contractor during the warranty period. If the warranty period is less than five years, the contractor is additionally liable for defects for five years from acceptance of the works by the employer if the employer can prove that they occurred as a consequence of the contractor’s improper performance.
If, as a result of a construction defect, the building is damaged or destroyed, as a consequence of which third parties suffer (their life, health or property), the owner (employer) is liable to them, and can then file a regress suit against the contractor. Such claims may be lodged throughout the life of the building.
3.6 Which party usually bears the risk of unforeseen ground conditions under construction contracts in your jurisdiction?
This matter is negotiable. By default, it is the employer’s risk but, if the contractor performed the necessary surveys and confirmed it was aware of the ground conditions, it might be the contractor that bears the risk.
3.7 Which party usually bears the risk of a change in law affecting the completion of the works under construction contracts in your jurisdiction?
This matter is negotiable. As a rule, contracts exclude application of the general civil legislation clauses about a material change of circumstances. Courts are also disinclined to support contractor claims for contract modification in connection with a material change of circumstances.
3.8 Which party usually owns the intellectual property in relation to the design and operation of the property?
IP rights are, in practice, virtually always transferred to the employer on acceptance of the design documentation.
3.9 Is the contractor ever entitled to suspend works?
The contractor has the right to suspend the works if the employer’s failure to perform precludes their performance: for example, the employer does not hand over materials or equipment that it was supposed to hand over to the contractor. Construction agreements often exclude this contractor’s right.
By default, the contractor does not have the right to suspend the works in the event of delay of payment by the employer; however, such right may be set in the construction agreement.
3.10 Are there any grounds which automatically or usually entitle a party to terminate the contract? Are there any legal requirements as to how the terminating party’s grounds for termination must be set out (e.g. in a termination notice)?
The law lists a number of circumstances where a contractor has the right to withdraw from the contract, for instance:
The law also sets certain grounds for the employer to terminate the contract, for instance:
The law does not set specific requirements on the termination notice.
3.11 Do construction contracts in your jurisdiction commonly provide that the employer can terminate at any time and for any reason? If so, would an employer exercising that right need to pay the contractor’s profit on the part of the works that remains unperformed as at termination?
By law, the employer is entitled to withdraw completely from the contract (termination for convenience), having accepted and paid for the deliverables performed and having paid for losses within the difference between the contract price and the price of the works performed. Contracts often restrict or exclude the employer’s obligation to pay for losses in this case.
3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give the affected party? Is it usual/possible to argue successfully that a contract which has become uneconomic is grounds for a claim for force majeure?
Under Russian law, force majeure releases parties from liability. Russian law outlines the key characteristics that constitute force majeure but does not list force majeure events specifically. Situations that are urgent, unpredictable and irresistible can constitute force majeure. The following events may be treated as force majeure:
In addition, the law specifies circumstances that cannot be considered force majeure, in particular:
Courts interpret the given clauses narrowly. It is impossible to argue successfully that a contract that has become uneconomic is grounds for a claim for force majeure.
3.13 Are parties, who are not parties to the contract, entitled to claim the benefit of any contractual right which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against the contractor pursuant to the original construction contracts in relation to defects in the building?
No such concept is available in Russian law. As a general rule, only a party to a contract may claim from another party to that contract. A subsequent owner of a building may claim damages for defects from the seller only in cases where the seller failed to disclose those defects to the purchaser (subsequent owner). Otherwise, it is assumed the subsequent owner acquired the building as is.
3.14 On construction and engineering projects in your jurisdiction, how common is the use of direct agreements or collateral warranties (i.e. agreements between the contractor and parties other than the employer with an interest in the project, e.g. funders, other stakeholders, and forward purchasers)?
Due to regulatory requirements and the specific rigid structure of a construction project, such instruments are not used in Russia. The key player in any construction project is the employer/developer, who directly contracts with all parties concerned.
3.15 Can one party (P1) to a construction contract, who owes money to the other (P2), set off against the sums due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off?
Offsetting of monetary counterclaims is possible under Russian law if both claims have already come due. It is virtually impossible to restrict or limit this right.
3.16 Do parties to construction contracts owe a duty of care to each other either in contract or under any other legal doctrine? If the duty of care is extra-contractual, can such duty exist concurrently with any contractual obligations and liabilities?
Russian law imposes a general assumption of duty of care and principle of good faith of businessmen. It is assumed that in performing their obligations under the contract the parties follow relevant principles, though courts as a rule follow explicit arrangements made by the parties in the contract and do not specifically assess the application of relevant principles.
3.17 Where the terms of a construction contract are ambiguous, are there rules which will settle how that ambiguity is interpreted?
If it is not possible to comprehend what the parties had in mind, the contract clause will be interpreted against the party that proposed it (contra-preferentum interpretation).
3.18 Are there any terms which, if included in a construction contract, would be unenforceable?
Conditions running counter to the mandatory statutory requirements are not enforceable.
As mentioned above, such terms as payment of the price after conditions occur that are not dependent on the contractor (such as the design documentation undergoing expert review, retention of payment before the warranty period expires, etc.) may also be recognised as unenforceable.
3.19 Where the construction contract involves an element of design and/or the contract is one for design only, are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in respect of his work?
The designer bears liability for the quality of the design during (i) construction, and (ii) operation of the facility within the warranty period.
It is also liable by recourse to the employer throughout the life of the building if, as a result of a design defect, a third party suffers damage (to their life, health or property) and corresponding payments were made by the employer to the third party.
3.20 Does the concept of decennial liability apply in your jurisdiction. If so, what is the nature of such liability and what is the scope of its application?
The concept of decennial liability is not applicable with respect to construction contracts.
The contractor liability for construction work defects lasts by default throughout the warranty period. If the warranty period is less than five years, the contractor is liable for defects within five years upon acceptance of the works by the employer provided the employer can prove those defects occurred as a result of the contractor’s improper performance.
4 Dispute Resolution
4.1 How are construction disputes generally resolved?
The majority of disputes are settled in state commercial courts.
If the contract includes commercial arbitration clauses, disputes between the parties are referred to the appropriate court of arbitration. An arbitration decision is binding and may generally only be challenged in a state court on procedural grounds.
4.2 Do you have adjudication processes in your jurisdiction (whether statutory or otherwise) or any other forms of interim dispute resolution (e.g. a dispute review board)? If so, please describe the general procedures.
The law obliges contracting parties to observe the mandatory pre-trial claims procedure. On amendment or cancellation of a contract, the default time for responding to a claim (unless changed by the contract) is 30 days. In practice, implementation of the pretrial procedure is usually a formality.
4.3 Do the construction contracts in your jurisdiction commonly have arbitration clauses? If so, please explain how, in general terms, arbitration works in your jurisdiction.
Arbitration clauses are normally used for large-scale projects. Otherwise, disputes are normally referred to state commercial courts.
International companies often insist on adjudication in an arbitration court of the International Chamber of Commerce (ICC), the International Commercial Arbitration Court (ICAC) under the Chamber of Commerce and Industry of the Russian Federation, the London Court of International Arbitration (LCIA) or another international arbitration institution.
4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles (legal or practical) to enforcement.
International arbitral awards are recognised in the Russian Federation – Russia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958.
Enforcement of such an award requires involving a state commercial court. The state court may only reject enforcement based on procedural grounds or if it believes enforcement of the award would contradict public order or ethical or legal principles.
4.5 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal.
A decision of a court of first instance may be taken to the appeal court and then a decision that has already come into legal effect may be appealed in the cassation court.
Normally it takes about six months to get a decision in the first jurisdiction court, the appeal takes another two to three months, and a further two to three months are normally required for the cassation.
4.6 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? If the answer depends on the foreign country in question, are there any foreign countries in respect of which enforcement is more straightforward (whether as a result of international treaties or otherwise)?
Russia is party to bilateral agreements with approximately 40 countries (such as Cyprus, Spain and Italy) on enforcement of relevant foreign court judgments.
The judgments of foreign courts of countries that do not have relevant bilateral agreements with Russia may be enforced through the Russian state courts, based on the reciprocity principle. In order to get a foreign court judgment enforced in Russia, the party concerned needs to provide the Russian state court with evidence that Russian court judgments are enforced in the relevant state.