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Practical Aspects of Greenfield Projects in St. Petersburg

by Karina Chichkanova

In recent years St. Petersburg has earned a reputation as an investment center with numerous greenfield projects. Greenfield projects involving the construction of industrial and sports facilities, transportation infrastructure, and residential developments, are underway. In the auto industry alone, four assembly plants have been built recently or are under construction (Toyota, Hyundai, General Motors, Nissan), and component and parts suppliers have a number of greenfield projects in progress. St. Petersburg has also established a technical-innovational type special economic zone, where a number of greenfield projects relating to the creation of innovative products are underway.

Underlying this success is the program of regulatory legal acts developed and implemented in St. Petersburg, which provide a clear and detailed framework for investment projects (many St. Petersburg laws have been taken as models by other regions). In particular, special (beneficial) procedures and conditions apply to projects of particular social, economic, cultural or other significance, known as “strategic investment projects”. (There are currently 21 strategic projects at various stages in St. Petersburg, including the automotive projects mentioned above). City officials have also acquired significant experience in commercial negotiations and show a willingness for open dialog with developers.

Practically all the investment projects in question are taking place on state land, as historically land has been and continues to largely be in state ownership. The most commonly used procedure for non-residential greenfield investment projects on state land is targeted allocation with prior site approval (Residential greenfield projects follow a different scheme – with allocation of the land plot under lease or into ownership by auction). This procedure has two main stages: (i) the developer conducts a survey of the site (in practice, the survey involves the collection of documents determining the ownership/legal status of the land plot, and engineering surveys), and (ii) the actual design and construction process. Legally, these two stages are covered by separate land plot leases concluded on the basis of a St. Petersburg Government Resolution allocating the land plots for the above purposes and on the terms in the Resolutions (usually up to one year for surveying, and up to three years for design and construction). Upon completing construction and obtaining a commissioning permit, the developer registers its title to the new building and has the right to buy out the underlying land plot from the city at a regulated price (the price is determined by a special formula based on the cadastral value), or to conclude a long-term lease agreement (up to 49 years).

Nevertheless, despite the well developed and smooth-running greenfield project system in St. Petersburg, there are a number of issues investors should take into consideration when deciding whether to proceed with a greenfield project in St. Petersburg. Among these questions are the following:

Limited choice of sites. The large number of investment projects has inevitably led to a shortage of suitable sites for greenfield projects. This is related both to the limited territory of St. Petersburg itself, and the specific site requirements for certain projects. The City Government is therefore lobbying for a merger with the neighboring region – Leningradskaya Oblast – and reclamation of additional territory from the Gulf of Finland (at least two major projects are underway on reclaimed territory).

Payments to the St. Petersburg budget for the right to implement an investment project. These payments can be significant (except strategic projects, which have large discounts and exemptions) and are calculated on the basis of the market value of the planned building. The market value is determined by an independent expert chosen by the developer, but must be approved by a special city institution.

Insufficient external infrastructure. Although St. Petersburg spends significant funds each year on developing and enlarging its utilities infrastructure, developers are often faced with non-existent or insufficient utilities capacity for their projects, particularly with regard to power. This issue is also complicated by the connection fee, which can be considerable. Where infrastructure is insufficient developers may be required to build the required capacity and hand it over to the operating companies as the connection fee.

Actual impediments. Often, greenfield project investors encounter the situation where the chosen site has vegetation, bodies of water or other features of indeterminate status (such as trees not in city woodland records, unregistered bodies of water). The indeterminate legal status of these features can significantly delay the process of determining the risks for the project, and steps to be taken to mitigate the risks.

These problems are, of course, not the only ones. At the same time, after more than 15 years of experience on the St. Petersburg real estate market, we can see that St. Petersburg is ready to go to developers and discuss how to reduce and/or redistribute the risks involved in projects. This does not, however, make it any less necessary for developers to ensure they have sound legal, technical and financial advisors for each greenfield project in St. Petersburg.

Kluwer Construction Blog

Construction Law

Decennial Liability and Latent Defects Contractors’ and Developers’ Liability in Dubai

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By Lisa Dale & Steven Hunt
Since the advent of Dubai’s construction boom circa 2002, fuelled by the relaxation of restrictions on property ownership by foreign nationals, thousands of new residential property units have been completed by developers and handed over to their new owners for occupation. This relatively recent phenomenon of home ownership on any significant scale has heightened the need for both contractors and developers to understand their potential legal exposure to home owners when defects begin to appear in the properties that they have either constructed or sold to them. …

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Project Management

Pre Construction Stage in Projects

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At this stage the project brief should be finalised, a preferred option agreed and the detailed design should be delivered within the identified parameters of cost, time and quality. Clear definition of the project is necessary in order to attain a successful outcome.

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Preconstruction encompasses the development of the detailed design, formulation of the tender documentation, undertaking the tender process and concluding the contract documentation. The choice of procurement route will determine how much of these stages overlap but by the start of this stage, a number of issues will have been addressed and actions taken, including the following:

Feasibility completed

LSC support for preferred option attained

Alternative site secured, disposals agreed

Surveys and statutory requirements concluded

Statutory authorities, utilities information concluded including consultation with the planning offices

Development cost plan prepared

Project team appointed. This should include main contractor representation as soon as is practical.

Project execution plan and programme established

Statutory Obligations

It is the duty of the design team to effect compliance with a statutory control and attain the appropriate consents e.g. consents for planning, Building Regulations, means of escape. Planning approvals can be a complex process and may require the appointment of specialist consultant to assist in attaining a successful approval.

Value Engineering

This is a process of examining the function of a building to ensure that it is delivered in the most cost effective way. It involves reviewing the design proposals at each stage of the design process to analyse whether client objectives have been achieved without over design or specification and at minimum cost. In major and complex projects this process may be best facilitated by a specialist in this field. In less complex projects this can be lead by the project manager.

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Contract Administration

The curse of the bespoke amendment

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by Philip Adams

I am increasingly fascinated by the extent to which clients and to a certain extent their lawyers, feel compelled to amend standard forms of contract, especially, bearing in mind the involvement of such organisations in the initial drafting. Next time you look at the Fidic Red Book for example, take a look at the ‘acknowledgements’ as these make for very interesting reading.

The ‘acknowledgements’ state that the drafts were reviewed by many persons and organisations, and that their comments were ‘duly studied by the Update Task Group and, where considered appropriate, have influenced the wording of the clauses.’ …

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Contract Administration

Building material firms adjust to price fluctuations

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Construction sector in the UAE witnessed a massive drop in costs during the past 12 months. Prices of most materials dropped by more than half compared to 2008.

Producers and distributors said they experienced a difficult year as reduced cost coupled with falling demand led to severe drop in revenues.

Most affected were ready-mix companies. Many of them had to cut their production by more than 50 per cent and send several staff on leave in order to reduce operational cost. …

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Construction Law

To What Extent Does Freedom of Contract Exist for You in the UAE?

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by Melanie Grimmitt

If you are a construction contractor accustomed to operating in common law jurisdictions where the doctrine of “freedom of contract” is generally upheld, you should be aware that the position under UAE law is different. We explore how it is different below …

Common Law Approach

In most common law and European jurisdictions, party autonomy and freedom of contract (whilst being gently eroded since the 19th century) are concepts that are recognised and respected. English law, for example, allows commercial parties to contract freely, provided that the agreement does not contravene any laws or public policy, and the courts will generally try to support the agreement between the parties. Although we can’t deny that notions of equality of bargaining power and fairness are increasingly being used to justify an interventionist stance, the courts of common law jurisdictions are – by and large – slow to use the doctrines of misrepresentation, mistake and economic duress to vary the terms of a commercial agreement.

The UAE position

The UAE, on the other hand, is a civil law jurisdiction, with its codified laws based on the Egyptian code, which in turn is derived from the French code. In addition, the laws of the UAE are influenced by Shari’a law. Nevertheless, as a general rule, under UAE law, the parties are entitled to agree on any contractual terms that they deem fit, provided that such terms are not inconsistent with the provisions of law or contrary to public order or public morals (pursuant to Article 2 of the UAE Commercial Code). Thus the common law concept of freedom of contract exists in the UAE but is subject to certain further limitations, based on ‘moral’ considerations.

Whilst in general the position in the UAE appears broadly similar to the English law position, there are some important differences, including the fact that in the UAE the scope of public policy exceptions and a court’s power to strike down or vary a contract are broader. This can cause challenges for parties who have become accustomed to operating in a secular legal and political environment, who may now be faced with having their contract varied or struck down on the basis of principles which may find their genesis in the Shari’a, for example.

In a construction context, the more limited application of freedom of contract in the UAE has important consequences for concepts that international contractors and developers may be familiar with, or take for granted, such as the interpretation of limitation of liability and liquidated damages clauses.

Examples of the differences in approach

Like English law, UAE law includes statutory implied terms that fetter the doctrine of freedom of contract. For instance, pursuant to the Civil Code parties are required to perform their contract in a manner consistent with good faith, (Article 246(1)). These statutory implied terms are different to those one might expect under English law, which are generally more tangible and objective.

A further example is the different approach taken to limitation of liability provisions as explained in my last blog.

Another interesting example is the different approach that the UAE takes to termination provisions, such as a termination for convenience clause. Again under English law, the Courts will generally uphold an agreed termination provision, including the right for one party to terminate its contract for convenience. The validity of such provisions in the UAE, however, is highly questionable. This is because UAE law prescribes the circumstances in which a contract may be terminated (which are limited and do not include a right to terminate a contract without cause) and because such provisions are considered to be contrary to Shari’a law. This is a topic to which we will return!

Therefore, whilst the concept of ‘freedom of contract’ can be said to exist in some form in the UAE, it is not the same as in English law. In the UAE there is a greater risk of the terms of a contract being altered and reinterpreted. In these circumstances it is vitally important to ensure contracts have been reviewed by lawyers familiar with UAE law so at least the areas of potential uncertainty are understood and action can be taken to mitigate consequential risks.

But which approach is better?

Well that, of course, depends.

The flexibility provided by the UAE law in some circumstances may be very helpful. For example a contractor faced with paying liquidated damages in circumstances where the employer has not suffered loss to an equivalent extent is likely to welcome the opportunity to argue that the liquidated damages provisions he agreed to should be varied by operation of the UAE law.

On the other hand greater certainty of contract may be argued to be a pre-requisite to construction risk management, which will surely be the focus of attention of the international contracting industry as it picks itself up from the worldwide economic downturn.

Perhaps the more interesting question is whether as a matter of principle the UAE should reach the same position in relation to freedom of contract as that found under the common law? Should freedom of contract supersede moral or religious considerations when determining the terms of an agreement between two commercial entities, or are the latter considerations more important?

Kluwer Construction Blog

Construction Law

Arbitrator Disclosures – Now Everyone Gets to Play

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by Andrew Ness

U.S. courts in recent years have imposed stricter obligations on individuals sitting as arbitrators to disclose to the parties fully any facts or circumstances that may give rise to doubts about their impartiality or independence. As a result, the arbitrators’ mantra has become “disclose, disclose, disclose.” Indeed, it has become fairly common in arbitrations under U.S. law to see arbitrators making continual disclosures throughout the arbitral process as to every minor event that could possibly be seen as questionable – such as receiving a phone call from an old college friend who happens to be a partner at the same large firm as is representing one of the parties, even though the old friend is in a different city and different practice area entirely, and has no connection whatever to the pending arbitration. Under a recent change in American Arbitration Association (AAA) Construction Industry Rules, the parties and their counsel now get to play the disclosure game as well.

The AAA Construction Industry Rules (formally the “Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes)”) are the rules most often selected for domestic U.S. construction arbitrations, and are used in many trans-national cases as well. The AAA Construction Industry Rules as most recently revised (effective October 1, 2009) now provide (in Rule 19(a)) as follows with respect to the applicable disclosure requirements (new language in italics):

“Any person appointed or to be appointed as an arbitrator as well as the parties and their representatives shall disclose to the AAA, as promptly as practicable, any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Such obligation shall remain in effect throughout the arbitration.”

So in an AAA construction arbitration, the parties and their counsel now have just as extensive disclosure obligations as do the arbitrators themselves. That means if counsel for one of the parties learns that her partner in a far-away city is buddies with one of the arbitrators, and this connection has not previously been disclosed, presumably she will now be the one to disclose it. It seems eminently predictable that disclosures by parties and counsel of facts giving rise to justifiable doubts about the impartiality of an arbitrator is rife with immense potential simply to embarrass everyone involved. And not just the embarrassment associated with having to call to everyone’s attention some relationship that, at least arguably, the arbitrator should have disclosed earlier himself. What if, instead of an old college friend, she learns instead that one of her partners is having an affair with the married arbitrator? In a hurry, this seemingly innocuous new rule could get very interesting indeed. Stay tuned. The American preoccupation with disclosing everything may lead down an interesting path.

Kluwer Construction Blog

Contract Administration

You’re Creeping Me Out – Design Creep under the FIDIC Silver Book

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by Sarah Thomas

In the wake of the current downturn, employers will increasingly look for greater budget certainty under EPC or Turnkey contracts. This is where the contractor undertakes all tasks – design, construction, management etc – so that, upon completion, the employer merely needs to ‘turn the key’ and operation of the plant or building can begin immediately. The whole point is that the contractor assumes price risk in return for relative autonomy over how he delivers the project – provided of course he meets the employer’s output requirements. But often employers want not just price certainty but also to retain control over design approval and how the project is actually delivered. This can lead to claims of ‘design creep’ by the contractor when he perceives that the employer is trying to introduce design improvements under the guise of reviewing the contractor’s documents.

But what is ‘design creep’? Why are contractors upset at its use and are their concerns justified?

I will be concentrating on the provisions of the FIDIC Silver Book, although design creep is not something particular to the Silver Book, or indeed any construction standard form.

Sub-clause 5.2 of the Silver Book allows the Employer to review the Contractor’s Documents. Nothing controversial about that. But what happens if the Employer undertakes a design review and makes ‘comments’ on those documents? Will those comments amount to a “Variation” (entitling the Contractor to time and money)? Or will they be taken as something less than a Variation, so that any additional work will have to be absorbed into the Contractor’s schedule and budget? This is the classic example of “design creep”.

What can the Contractor do when he considers that a comment constitutes a variation?

The first question to ask is: Does the “comment” amount to a “variation” under the terms of the contract? A Variation is defined in the Silver Book as “any change to the Employer’s Requirements or the Works which is instructed or approved as a variation under Clause 13″. Clause 13 [Variations] may be initiated at any time, “either by an instruction or by a request for the Contractor to submit a proposal”. The Contractor is often put in a difficult position because he must execute each variation unless he promptly gives notice that he cannot implement it (because of lack of goods, increased risk to safety or suitability of the Works or to his ability to meet Performance Guarantees). Obviously the broader the Employer’s Requirements and the Works are described in the contract, the less likely it is that the comment will be seen as a change to the Employer’s Requirements or to the Works.

However, if the comment does require a clear change, the Contractor’s first step should be to write to the Employer asking him to confirm whether the comment amounts to an instruction to change the Works under clause 13.1.

The second step is to follow the requirements of sub-clause 20.1 [Contractor’s Claims] and request the Employer to agree or determine adjustments to the Contract Price and the Schedule of Payments, proceeding in accordance with sub-clause 3.5 [Determinations].

But what if the comment does not amount to a ‘change’ as such. Is the Contractor still bound to follow it? This is the more difficult area. The Contractor could argue that the provision of comments that do not specify “non conformity with the Contract” is not a proper use of the review procedure under sub-clause 5.2. That clause only allows the Employer to give notice to the Contractor if a Contractor’s Document fails to comply with the Contract. There is a difference here between the FIDIC Silver and Yellow Books. The key difference is that the documents are submitted “for review and/or for approval” (if so specified) under Yellow but under Silver, they are submitted for review only. Thus under Silver, the argument can be made far more strongly that the Employer can only issue a notice if the documents don’t comply with the Contract. Under Yellow on the other hand, where a document is specified “for approval”, the Engineer can give notice of approval with or without comments. This is an important difference and is the reason why “design creep” may well be a bigger problem under the Yellow Book than under Silver. But under both contracts, it is important to remember that the Employer’s scope to review the Contractor’s documents is confined to issuing a notice that the document does not comply with the Contract. A Contractor would also be well advised to check the formalities for issuing instructions and variations under his contract – to see whether he does in fact have to implement the change. For example under the FIDIC contracts, an instruction must (1) be given in writing and (2) state the obligations to which it relates as well as the sub-clause in which the obligations are specified [Sub-clause 3.4].

No matter what approach the Contractor adopts, to the extent that the Contractor is making a claim under a FIDIC contract, he will have to comply with the provisions of sub-clause 20.1.

So, what has been your experience of design creep? Is it occurring more or less often? What do you see as the threshold that needs to be reached in order for a comment to turn into a Variation? I would be interested to hear your war stories.

Kluwer Construction Blog

Construction Law

Flexible Arbitration Filing Fees Introduced by AAA

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by Andrew Ness

While arbitration is often touted as being a less expensive alternative to litigation, the initial cost of initiating arbitration has always been considerably more expensive than filing in court. Typical filing fee in a U.S. court is a few hundred dollars, while administering authorities typically have filing fees in the thousands of dollars. The American Arbitration Association (AAA), self-described as “world’s leading provider of conflict management and dispute resolution services,” is known for its high filing fees that get progressively greater as the amount in dispute rises. But the AAA will now be providing claimants some relief on that front.

The AAA has initiated a new Flexible Fee Payment Schedule intended to provide cost-savings to claimants. The new option is a pilot program available on all cases filed under the AAA’s construction and international rules (as well as the commercial and employment rules) through May 30, 2010.

Here is how it works. Instead of paying a single initial filing fee, the claimant pays a smaller initial filing fee and then a “Proceed Fee” within 90 days. For example, for a construction claim of $1 million, the initial filing fee is $1,000 and the subsequent Proceed Fee is $5,600. The initial filing fee under the AAA’s standard fee schedule would be a single payment of $6,000. The Flexible Fee option is supposed to provide a cost savings, but the combination of the initial fee and the full Proceed Fee is higher than the single initial fee under the standard schedule. So, where is the cost savings? The answer is: the savings come only if the parties appoint their arbitrators without assistance from AAA. If the parties are able to agree on their arbitrators, there is a 50% discount on the Proceed Fee. So, in the example above, the combination of the initial fee and discounted Proceed Fee becomes $3,800 – a savings of $2,200 compared to the standard fee.

Procedurally, if the claimant elects to proceed under the Flexible Fee option, the AAA will notify the respondent of the demand and set the date for filing the answering statement and any counterclaim, but then does nothing more until the Proceed Fee is paid. The Proceed Fee must be paid within 90-days or the AAA will administratively close the file. This 90-day window is for the parties to agree on the appointment of the arbitrators. If they succeed, the claimant pays the discounted Proceed Fee, and the AAA proceeds with the arbitration. If not, the AAA will conduct its standard arbitrator appointment process once the full Proceed Fee is paid.

So the new option provides greater flexibility and offers the potential for cost-savings if the parties can appoint their own arbitrators. Where there is a high likelihood that the parties will not be able to mutually agree on the arbitrators and no immediate settlement is in prospect, the AAA’s standard fee schedule remains preferable. Complete details and a schedule of the fees under the standard and Flexible Fee options can be found at the end of the AAA’s construction industry arbitration rules on the AAA’s website (www.adr.org).

Todd Wagnon
Andrew Ness

Kluwer Construction Blog

Construction Law, Contract Administration

Tales Of The Unexpected: Where Liability Lurks Unseen #3

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by Melanie Grimmitt

Recap

After a diversion a fortnight ago to address the newsworthy events in Dubai, normal service resumes with this blog. The previous two blogs in this series considered decennial liability and liability for harmful acts under UAE law.

This blog will briefly consider whether it is possible to limit liability under your contract eg by including liquidated damages provisions, and whether the courts will give effect to such a provision.

Limiting liability

On the face of it there seems clear evidence that it is possible to limit liability under a contract – take a look at Article 390(1) of the Civil Code.

However, it is not so certain that such a limitation will be upheld. In fact, the very next provision of the Civil Code (Article 390(2)) suggests that a judge may vary a clause seeking to fix compensation in advance so as to make the compensation fit the amount of loss suffered in the particular circumstances. Not exactly what contract drafters from common law jurisdictions will have expected!

But our contract is commercial not “civil”!

Some commentators have argued that the Civil Code does not apply to commercial contracts, and that therefore parties to commercial contracts can afford to ignore this possibility. This view is based on previous court decisions where the court has declined to apply the Civil Code to commercial contracts. Such a position would accord with English law where additional protection is given to consumer contracts, but where commercial parties who have equal bargaining power have far greater freedom to determine the apportionment of risk and liability between them.

However there is also plenty of case law where the courts have applied the Civil Code to commercial contracts. So better to err on the safe side and assume that this provision is relevant to commercial contracts.

No excuse for fraud or gross negligence anyway

In addition, even were it to be found that the Civil Code did not apply to commercial contracts, the courts would still be likely to interfere with any purported limitation of liability for fraud or gross negligence on public policy grounds.

When will a judge interfere and how?

There is no express guidance in the Civil Code as to the circumstances in which the court will exercise its power under Article 390(2) to adjust the measure of damages to reflect the actual loss. So far as I am aware, even Egyptian law, on which UAE law is in large measure based, only provides guidance on when a fixed amount of compensation may be reduced, rather than when it may be exceeded. Interestingly a similar provision under Bahraini law (also based on Egyptian law in large measure) expressly only refers to a reduction in the amount of fixed compensation where it can be established that no loss has been suffered or the amount fixed was grossly exaggerated (not far from “genuine pre-estimate of loss” perhaps, albeit that the test for genuine pre-estimate of loss is applied at the time the damages are fixed rather than when the loss is suffered).

However, it is possible to draw conclusions as to the application of Article 390(2) from general principles inherent in UAE law that relate to the conduct of parties to a contract. On this basis the courts would be more likely to adjust (or ignore) a limit on liability if the harm results from, for example, conduct by a party which is contrary to good faith, or an act which is wrongful or deliberate.

What to do?

Perhaps the best advice is to adopt the usual methodology to liquidated damages clauses and other “fixing” of liability clauses which would be adopted in common law jurisdictions: make sure the fixed compensation is actually likely to reflect the loss which will be suffered, rather than a windfall gain. And if you receive a claim for what you perceive as a windfall gain, don’t assume you must pay it even though the sum is clearly due under the terms of a contract – there might be grounds for challenge.

Kluwer Construction Blog

Contract Administration

Private works contract and the owner’s legal guarantee obligation

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by Maxime Simonnet

Commentary on the decision rendered by the third civil chamber of the Cour de Cassation (French Supreme Court) on September 9, 2009

To protect the contractor from the risk of the owner’s insolvency, the law No. 94-475 of June 10, 1994 on the prevention and treatment of the difficulties encountered by contractors instituted the obligation for the owner to guarantee the contractor that the price of the ordered works would be paid.

This obligation, set out in Article 1799-1 of the Civil Code, concerns exclusively private works contracts, whose amount exceeds the minimum threshold fixed by the decree of July 30, 1999 at EUR 12,000.

It is mandatory, as Article 1799-1 of the Civil Code is public policy, and is materialized by a control mechanism of the payment of the loan financing the contractor’s contract, or, in the absence of a loan, by an obligation for the owner to provide to the contractor a specific guarantee.

In a decision rendered on September 9, 2009, the third civil chamber of the Cour de Cassation confirmed once again these various principles by recalling that the owner which enters into a private works contract must guarantee the contractor that the sums owed will be paid, no derogation being allowed.

Moreover and above all else, the Court recalled that the owner is liable for this payment guarantee obligation as from the execution of the works contract, the owner being unable to postpone it or make it conditional.

In this case, an owner had engaged a private contractor to renovate hotel rooms.

The owner had placed three service orders with its contractor, subject however to the latter providing to the owner a bank guarantee for the total amount of the works (considering its wish to subcontract the contract).

The contractor’s bank, for its part, agreed to provide it with this guarantee, but subject to the contractor obtaining from the owner a joint suretyship guaranteeing the payment of the contracts, in accordance with Article 1799-1 of the Civil Code.

Confronted with this request from the bank, the owner notified its contractor that the service orders were null and void on the grounds of the failure to meet the condition precedent to obtain the bank guarantee.

Having had its claims for the payment of various down payments and damages dismissed in first instance and in appeal, the contractor lodged an appeal before the Cour de Cassation.

Referring to paragraphs 1 and 3 of Article 1799-1 of the Civil Code, the Cour de Cassation quashed the decision of the Court of Appeal and granted the contractor’s claim.

Because, as from the execution of the contract, the owner was indeed liable, under Article 1799-1 of the Civil Code, for its legal guarantee obligation, without being able to condition it on the provision of a guarantee by the contractor.

By Maxime Simonnet and Chloé Niedermaier

Kluwer Construction Blog

Construction Law, Contract Administration

Issues involved in Taxation of Construction contracts

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by Sujjain Talwar

There is a lot of mystery regarding taxation of Construction activities in India. The mystery starts from the fact that a Construction contract involves both labour and material and hence, both Service tax and Value Added tax is levied on one transaction.

The process becomes more complex depending upon a number of factors such as the Scope of work, the nature of the contract, whether the contract includes any further sub-contracting, whether individual prices have been specified for each part of the scope of work and whether the contract involves off-shore and on-shore activities etc.
Let us first consider the Indirect taxes applicable on a Construction contract. As already stated above, a Construction contract involves both labour and materials. Hence, a Construction contract is liable to both Service tax and Value Added tax.

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