Law firm’s Lextal lawyer Lina Vaitiekūnienė successfully represented Latvian company SIA Olimps in the court for the right to deduct costs related to repairing the defects of the contractor’s work, from the amounts detained under the contract. The essence of this case is that the contractor, the bankrupt company, applied to the court, requiring the client to pay the detained amounts according to the contract to the contractor, the bankrupt company, since the non-payment of the detained amount violates the interests of the creditors of the bankrupt company, despite the fact that the company did not correct the deficiencies properly, which was a condition under the contract for the payment to the contractor of the amounts detained. The court accepted the arguments of Lextal’s lawyer that deductions from the amounts detained would not be considered as offsetting against counterclaims and could not be considered to be a violation of the bankruptcy law of the company, and also indicated that the bankruptcy proceedings against the contractor do not automatically deprive the contractor’s right to detain the corresponding amounts agreed in the contract for a warranty period. In the event of bankruptcy or restructuring, the implementation of the continuing obligations of the contract, such as warranty for several years, etc., is made more difficult, assuming that in the event of the contractor’s bankruptcy, the legitimate expectations of the client arising from the implementation of the original terms of the construction contract may be violated. Obviously, a contractor who is a subject to bankruptcy proceedings will not be able to provide after-sales service, so the client’s behavior to detain the amount of money corresponding to the warranty size is reasonable from a fair business practices point of view. It should be noted that the court, in deciding on this dispute, followed the provisions of the contract and evidence of non-corrected deficiencies and well-founded costs by repairing the deficiencies of the works at its own expense by the contractor. It is important that the subcontractor was constantly informed of the progress of the repair of the defects.
This experience prompted Lextal’s lawyers to share their advice with the participants of the construction process. Lextal’s lawyers always recommend clients to include warranties concerning the contractor’s responsibility for remedying any defects in the works performed and obligations for the warranty period. There is a number of cases in law firm Lextal practice when clients apply for help as a contractor goes bankrupt and is no longer able to remedy the defects. How to avoid such a situation?
Law Firm Lextal recommends:
- To identify in the contract the relevant amounts that are withheld by the client from the price of the works performed and are detained until the final works are presented after the defects are corrected or the contractor’s obligation to provide a bank or insurance company guarantee for the repair of the defects and the warranty period;
- To discuss in detail the procedure for accepting final works and remedying work defects;
- To specify in the works acceptance-transfer act what specific defects must be corrected and in what period of time;
- To note that if the contractor fails to remedy the deficiencies, the contractor may correct them by using other contractors and reduce the detained amount by the costs of repairing the defects;
- To notify the contractor in writing of the intention to remedy the deficiencies at the client’s expense and to reduce the amounts detained by the costs of repairing the defects or intending to use the warranty, if the contractor fails to comply with his obligations to correct the defects.
- To keep the contractor informed of the progress and costs of the correction of the defects and the reduction of the amounts of money detained or the usage of the guarantee.