Construction law and international arbitration

Many building contracts and the associated terms and conditions contain an arbitration clause as standard. The arbitration clause provides that a dispute between the parties must be submitted to an arbitration body. If a dispute should arise, the parties involved must apply to the arbitration body. If they nevertheless submit the matter to an ordinary court, this court will have to declare itself incompetent.

Because the point of departure in legal disputes is that justice is administered by the regular courts, resolution by arbitration must be a deliberate choice.

Construction law is a specialism. On the one hand this is because of the technical dimension, comprising physical-technical aspects such as knowledge of constructions, installations, soil conditions, ecological circumstances, etc. On the other hand, there are the specific rules in frequently used general terms and conditions (FIDIC Dredgers Contract, Construction Contract, Plant & DB Contract; DBO Contract, and EPC/Turnkey Contract), which are geared to the construction process.

Issues commonly encountered in construction arbitration

Rectification of defects

Defects in the construction project that constitute a breach of the agreement and fall within the warranty must in principle be repaired by the (building) contractor. Of course there are exceptions to this rule. If the (building) contractor fails to do so without valid reason, the principal may demand that the (building) contractor is ordered to repair the defects within a reasonable period to be set by the arbiter.

Alternative compensation

If the (building) contractor fails to carry out repairs, the principal may also claim alternative compensation. The principal will do so, for example, if rectification of the defect is no longer possible, or if the principal has lost confidence that the (building) contractor will repair the defect.

In that case, the alternative compensation may be equivalent to the decrease in value due to faulty workmanship, or the costs incurred by the principal in having the defect repaired by another (building) contractor, plus statutory interest and extrajudicial costs.

Additional compensation

It is possible that a principal sustained additional damage because of a building defect. Examples include water damage due to a leaky roof. In such cases, the principal may claim additional compensation. This claim may be brought on top of a claim for rectification of defects or termination of the agreement.

A declaratory decision

If there is a dispute between the (building) contractor and the principal on whether defects have been adequately repaired, the (building) contractor may ask the arbiter to express an opinion in the form of a declaratory decision. In the event of delivery arbitration proceedings, the (building) contractor may combine such a claim with an application for the release of a deposit or bank guarantee and a claim for payment of statutory interest on wrongly suspended payments.

Imposition of an incremental penalty payment

If a claim is brought for performance of the agreement, for example if the principal refuses to cooperate in the transfer deed or the (building) contractor refuses to repair defects, it may be useful to ask the arbiter to impose an incremental penalty payment. An incremental penalty payment is a kind of financial punishment which the arbiter may attach to non-compliance with an arbitral award. An incremental penalty payment is meant to be an extra incentive to ensure fulfilment of the obligations under an award. The incremental penalty payment does not replace the principal award and must always be combined with a principal claim. Because arbiters are not authorised to impose an incremental penalty on their own initiative, the claimant must specifically request an incremental penalty payment.

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