In the construction sector, a construction warranty not only ensures the quality and durability of a project but also serves as a legally binding commitment between involved parties. The contractor is responsible for repairing and addressing damages and defects that arise after the project is completed within a specified period to ensure the building is stable and safe. However, when the contractor fails to fulfill warranty obligations, it can cause significant damage to the investor. So, what is the legal liability of the contractor for failing to perform the warranty? In this article, TNTP will provide our readers with an in-depth look at ” The legal liability of the Contractor in performing construction warranty: regulations and remedies.”
1. Legal basis for determining the Contractor’s warranty responsibilities
The contractor’s warranty responsibilities are established based on fundamental principles in law and the contract agreements between the parties. In construction contracts, both parties must comply with the terms related to the construction warranty. If the contractor violates these terms, their liability will be assessed on the following grounds:
• Construction Law 2014 and its guiding decrees and circulars specify the contractor’s obligations. Specifically, Clause 1 of Article 125 of the Construction Law 2014 states that “The construction contractor is responsible for the warranty of the works they construct. The contractor supplying construction equipment and technology devices is responsible for the warranty of the equipment they provide.”
However, the construction contractor and equipment supplier have the right to refuse warranty in cases where damage or defects arise not due to the contractor’s fault or from force majeure causes stipulated in the construction contract. If the damage or defect results from the contractor’s fault and the contractor does not perform the warranty, the investor has the right to use the warranty funds to hire other organizations or individuals to carry out the warranty work. The investor, owner, or manager of the project is responsible for operating and maintaining the construction properly during its use.
• Signed Contracts: The contract serves as the primary legal document to determine the contractor’s warranty obligations. The warranty clause in the construction contract typically includes specific terms such as the warranty period for each type of work, the rights and obligations of both parties during the warranty period, including the contractor’s responsibility for technical defects and repairs without incurring additional costs, and the procedures for warranty requests and the time frame for addressing issues after receiving such requests.
2. Remedies for non-performance of warranty by Contractors
• Contractual penalties: Construction contracts often contain penalty clauses for breaches when one party fails to meet its commitments. The penalty rate can be agreed upon by the parties, but for projects using public investment or state capital, the penalty cannot exceed 12% of the contract value. Contractual penalties serve as a deterrent, ensuring that contractors fully comply with their warranty commitments.
• Compensation for damages: If a contractor fails to perform the warranty and it results in damages to the project, they are responsible for compensating all or part of the damages. The compensation is determined based on the extent of the damage, the contract’s provisions, and the value of the losses incurred. This includes both property damage and costs related to repairs or replacements.
– Direct damages: The investor can claim compensation for any costs incurred due to extended construction periods, such as labor or equipment rental fees or project management expenses. For example, if the project is delayed by three months, the investor may request compensation for machine and worker rental costs during that period.
– Indirect damages: Other losses, such as lost due to missed business opportunities or delayed project operation, may also be included in the compensation claim, depending on whether the parties have agreed on this in the contract, and the investor must provide evidence of the specific losses.
• According to Article 419 of the Civil Code 2015 and Clause 5 of Article 146 of the Construction Law 2014, the breaching party (contractor) must compensate for all damages caused by the breach, including property damage, lost income, and reasonable costs incurred by the aggrieved party (investor).
• Withholding payment: The investor has the right to withhold any remaining payments (if applicable) to the contractor until the contractor has rectified the project’s defects and damages.
Typically, a portion of the contract value (usually 5-10%) is retained after project completion and is only released after the warranty period or once all technical errors have been corrected.
• Hiring alternative contractors: If the defects and damages are due to the contractor’s fault and fail to perform the warranty, the investor may use the warranty funds to hire other organizations or individuals to carry out the warranty work.
3. Solutions to minimize risks when Contractors fail to perform warranty obligations
To minimize risks arising when contractors fail to fulfill their warranty obligations, the investor should proactively implement preventive measures from the contract drafting stage and throughout project supervision. Some specific solutions include:
• Drafting detailed contracts: The construction contract should clearly outline the contractor’s warranty obligations, including mutual agreements on the warranty period for construction works, equipment, and technology, the methods and forms of warranty, warranty value, and the retention, use, and refund of warranty money or other equivalent forms of guarantee. Contractors should only be refunded the warranty money or security after the warranty period ends and the investor has confirmed the completion of all warranty obligations. The contract should also include clear penalty clauses and specify the extent of damage compensation when the contractor fails to perform the warranty.
• Requiring a warranty bond: The investor may require the contractor to provide a warranty bond from a reputable bank or financial institution. The warranty bond is a financial safeguard for repairs and defect rectification if the contractor does not fulfill their obligations, giving the investor an additional financial resource to handle warranty risks.
The contractor’s legal liability for failing to perform the construction warranty as per the contract is a critical issue that needs careful consideration. To avoid unwanted legal disputes, both the investor and the contractor must comply with the contract terms and relevant legal provisions. Prompt and appropriate handling of violations will protect the rights of all parties and help maintain long-term cooperative relationships.
This article, titled ” The legal liability of the Contractor in performing construction warranty: regulations and remedies” is provided to you by TNTP. We hope it will be of value to our readers.
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