Italy: How To Reduce Construction Disputes

Last Updated: 19 September 2017
Article by Giuseppe Broccoli

A. Introduction

In general terms construction contracts (especially those relating to international projects) have usually a complex structure for both technical and other reasons (just consider, for instance, cultural and linguistic differences among the parties). Such complexity is even more relevant if we consider contracts for the construction of infrastructures or industrial and productive plants.

It generally takes a few years to complete this kind of works and such long period of time makes it even more difficult for the parties to cooperate, since certain of the contractual initial conditions may change (just consider labour costs or raw materials price) or because part of the management changes over the time.

Good "project management" rules are essential for a positive outcome of the project and to reduce litigations to a minimum risk.

From a legal point of view there are some basic rules that, if duly followed, help to reduce construction dispute or minimizing the risk of controversies between the Owner and the Contractor.

Clearly there is no 'one size fits all' approach for any contract. Just consider the differences between:

  • the construction of infrastructures (a bridge, a dam, a railway); and
  • the construction of production plants (a factory, a power plant);

or between:

  • a contract for the supply and the installation of (even complex) machinery; and
  • an EPC contract.

However, there are some general rules that allow, if duly applied, to minimise the risk of litigation.

B. How to reduce construction disputes: the first 5 essential rules

First, good project management rules imply that everyone involved in the contract (project manager, contract manager, document controller, in-house lawyer) act in an interdisciplinary and cooperative way.

Turning now to the basic but essential rules, they can be summarized as follows:

1. ANALYZE the contract in its entirety. In International Construction projects, the contracts are "self-regulating", meaning that they include (or try to include) every aspect of the relation between the parties to avoid discussions and disputes as much as possible, so every clause has its weight. The contracts are usually very complex, but (often) the good thing is that usually they are based on standard contracts (i.e. FIDIC, ICC or LOGIC) widely used internationally;

2. EXAMINE very carefully some specific clauses that are often read too quickly. For example, clauses that regulate:

  • the Scope of work (ie the real object of the contract): it is on the basis of the Scope of Works (including specifications) as described in the contract that the correct or incorrect performance of the Contractor is evaluated;
  • the payment terms and their relationship with the construction timescale (negative cash flow is one of the first causes of contract failure);
  • the bonds that should be provided by the Contractor or by the Owner and their conditions (unconditional bonds at first demand are the most common and their unfair or abusive calling can cause the failure not only of the contract but of the contractor itself);
  • the changes in the Scope of Work (if the procedures for change orders or variations are not well regulated by the contract, there is a true risk to end up with a dispute);
  • the completion and pre-completion tests (various disputes arise from late or unjustified execution of the tests or from the failure to properly regulate the procedure and the timing for their execution);
  • the termination of the contract and in particular the precise identification of the causes that entitle the parties to terminate the contract and the compensation that the Contractor is entitled to receive in case of termination of the contract without reason or at the Owner's convenience;
  • the dispute resolution clause which too often is not analysed with due care and the result is that, for instance, construction disputes for a huge project are to be resolved by local Courts which might not have any specialization in complex construction projects;
  • applicable law. Also in such case the contract must be analysed having in mind the law which governs the contract since there might be certain legal provisions which apply notwithstanding what is provided in the contract.

3. KEEP written and accurate documentation of every event related to the contractual relationship. Too often when dealing with the Owner, a Contractor believes that a phone call is better than a formal letter. Not only it is recommended to keep track of the correspondence with the Owner, but also to take note of any kind of event and meeting (both internal and with the Owner or the suppliers) through detailed minutes of meetings. In case of disputes, only a punctual and precise "documentary records" of the facts will allow you to reconstruct (and prove) the events;

4. NOTIFY immediately to the Owner any kind of event that gives you the right to extend the completion term or to demand any increase of contract price. Start a dialogue (which should be supported by appropriate documentation) to prevent any possible controversy. Under many standard contracts (i.e. FIDIC contracts) there is a precise timing to file a claim. Be sure to include a timing also in your contract bearing in mind that, under the applicable law, the Contractor might lose its right to submit any claim due to statute of limitation;

5. KEEP always the project timeschedule updated and use it as a live record of the events that have any impact on the execution of the project. This will allow you to prove any event that caused a delay and any related responsibility. The timescale shall not be considered as a "static" document, that can be left aside once filled out. Instead, it is one of the fundamental instruments to prove that an event might have caused a delay and to recognize any connected responsibility.

C. Some of the most frequent causes of disputes in International Construction Contracts

In general terms, in (but not only) an international construction contract, the Contractor's goal is to maximize, in a legitimate way, its profit. On the other hand, and in an equally legitimate way, the Owner wishes to spend as little as possible.

This might be the first cause of conflict between the parties.

In more practical terms, there are various reasons to explain the high level of construction disputes (in addition, as said, to cultural, legal and linguistic reasons):

  • the persistent crisis in this sector pushes Contractors to accept at-cost (or even loss making) agreements in the hope of raising some more funds from the Owner over time through claiming;
  • the description of the project, provided by the Owner, might be inadequate or generic (or it is mis-read by the Contractor). As a consequence, the Contractor offers a price that it is often not enough (if no changes occur) to bear the costs of the works done or to be done;
  • an unsophisticated management (for technical reasons, or for the lack of adequate resources) often causes difficulties in relation to both timing and proper execution of the works;
  • the Owner might delay the acceptance of the work (either reasonably or not), causing a further increase of the costs that the Contractor will not easily recover.

D. Conclusions

international construction contracts are complex agreements for various reasons, technical or purely contractual. Just consider the fact that they relate to the construction of plants or complex infrastructures.

Furthermore, such contracts are subscribed by parties with different cultural backgrounds. The cultural factor has a certain impact in the management of international contracts (just think, for example, about an agreement signed by an Italian and a South American, Arab or Indian party).

No doubt that one of the winning elements of any contract is to try to comprehend the cultures you are dealing with, understanding the differences between the Owner and the Contractor.

That being said, the above mentioned rules are rules of good sense that, unfortunately, only a few times are found to be carefully followed.

However, on the basis of practical experiences, it can be said that they are a basic tools to limit the rising of disputes that might cause severe damaging effects on the parties.

This is the first of a series of articles that we will publish on the management of construction contracts. If you wish to stay updated subscribe to our Blog.

Subscribe to our blog

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Giuseppe Broccoli
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.