Newsletter
IMPACT OF THE CIVIL CODE AMENDMENT ON CONSTRUCTION CONTRACTS
Seven articles were revised and one article added in the Chapter "Work for Hire Contracts" of the Civil Code in the recent amendment of 2 April 1999. These changes are significant to rights and obligations of owners and contractors in construction contracts as set forth below:
A paragraph was added to Article 490 to provide that if a contract requires materials be supplied by the contractor, in the absence of counter-evidence, the cost of the materials should be included in the contractor's remuneration. If there is counter-evidence, the cost should be calculated separately.
Prior to the amendment, the ROC courts held different views as to whether a contract requiring the contractor to provide all or part of materials was a sale contract or a work for hire contract. It is now certain that such contracts will be considered work for hire contracts.
A second paragraph was added to Article 495 to provide that, if a contract is for the erection of a structure or other works executed on land, and a defect attributable to the contractor exists in the work which is so substantial that use of the work is not possible, the owner may rescind the contract.
Prior to the amendment, if the contracted work was for the erection of a structure or other works executed on land, even though there was a substantial defect attributable to the contractor in the work, the proviso of Article 494 denied an owner the right to rescind the contract.
This new paragraph applies to contracts entered into prior to the promulgation of the Civil Code amendments.
A new Article 501-1 was added to provide that, a contractor who intentionally conceals defects shall still be liable for defects even though there is an agreement to release or limit the contractor's liability.
Article 502 was amended to expressly provide that, the right of an owner to demand a reduction in remuneration or compensation for delay of work if the contractor cannot complete the work within agreed time applies only if the work has been completed by the contractor. The owner may not make such claim if the contractor has not completed the work. In addition, the owner is given another option in addition to demanding a reduction in the remuneration, i.e., damages for losses caused by delay of work. Therefore, an owner may decide to seek a reduction in the remuneration or claim damages for losses caused by the delay depending on whether proof of losses is available.
In addition, paragraph 2 of Article 502 was amended to provide that, if completion or delivery of the work at a definite time is an essential element of the contract, the owner may rescind the contract and seek damages against the contractor for losses caused by the contractor's failure to comply with the terms of the contract.
Article 503 was amended to conform with the amended paragraph 2 of Article 502. The amended Article 503 provides that, if the contracted work is delayed due to causes attributable to the contractor, it is foreseeable that the work cannot be completed within the agreed time, and timely completion or delivery of the work is an essential element of the contract, the owner may rescind the contract and demand compensation for losses.
A paragraph was added to Article 507 to provide that the contractor has the right to rescind the contract and seek damages against the owner if the latter does not perform his obligation to provide necessary assistance (e.g. site access) within a time period as notified by the contractor.
Article 513 was amended to regulate the contractor's statutory mortgage:
1.The amount secured by the contractor's statutory mortgage is limited to the amount of the contractor's remuneration.
2.The right of the contractor is only to request the owner to register a mortgage. The contractor does not automatically obtain a statutory mortgage as was the case previously. Therefore, registration will be a prerequisite for the statutory mortgage of the contractor.
3.The contractor may seek registration of the statutory mortgage prior to start of the work.
4.The contractor may unilaterally apply for registration of the statutory mortgage if the contract has been notarized.
5.The registered mortgage to secure the remuneration for repairing work is superior to any other mortgages to the extent of any increase in the value of the immovable due to the work.
Article 514 was amended to provided that, an owner's right to claim damages shall be subject to a one-year statute of limitation.
In addition, the amended Article 191-3 provides that, a person who operates certain business or is engaged in other works or activities, in which there is a risk to cause damages to others due to the nature of such works or activities or the tools or methods that he/she uses, shall be responsible for the damages caused to others. The amendment of this article is of particular importance to contractors in construction contracts since their work or tools used may cause risk of losses to others. However, a proviso of Article 191-3 provides for an exoneration of such liability if the losses are not caused by his/her work or activity, or the tools or method used, of if due care has been taken to prevent injury.