Final Accounts in Construction Contracts and Collection of Claims
The General Terms and Conditions (GTC) of building contracts are wide and complicated in scope and challenging to interpret. The GTC means a standard form contract, whose clauses are the same within the entire construction industry. They are meant to help parties to draft contracts by providing a template upon which a more detailed contract can be created. A subcontractor still often finds themselves being an underdog compared to the main contractor and its lawyer army.
It is essential to know the GTC and be able to capitalize on the opportunities they offer. For example, it is important the subcontractor is aware of circumstances which justify the lengthening of the contract time and thus the subcontractor may demand additional time to complete the construction if required. The main contractor rarely offers any additional allowances. On the contrary, the main contractor might pressure the subcontractor to make haste and have its employees work overtime on its own expense etc. The main contractor wants to prevent delays at any cost since it is liable to the party ordering the construction work and thus may be subjected to contractual penalties. Knowing the meaning of the GTC gives protection in cases when there are issues with the contract.
The current General Terms and Conditions of construction work date back to 1998 so they are over 20 years old. The GTC are not fully free of obscurity, rather they still have wordings open to interpretation, even after 20 years of application. We think a good example is the Supreme Court decision KKO 2017:14 from year 2017. The case was about a subcontractor claiming payment for additional work which was not included in the original construction contract as well as payment for the rest of the contractual price. The complaint was filed before the parties had concluded final accounts. The examination procedure for approval of the construction project was not carried out either.
Both the District Court and the Court of Appeals found that the complaint was to be dismissed due to being filed prematurely. The General Terms and Conditions state that any claims must be presented during the examination procedure for approval and later financial claims and other such matters between parties must be provided in the final accounts of the construction project. Both lower courts found that there was a contract between the parties and thus the subcontractor could not claim payment in contradiction to the general terms and conditions.
The case reached the Supreme Court on appeal. The essential question in the dispute was whether the general terms and conditions prevent filing a complaint action of debt concerning payments and such matters which should be conducted in the final financial account between the parties or if it possible to collect a debt via judicial system even before that. Noteworthy is the Supreme Court case No. 81 of year 1995 in which the Court had already assessed when a complaint is filed prematurely. The decision was about a tort claim based on voiding a contract, and the complaint was filed before the final financial account. The case was dismissed for being filed prematurely.
The Supreme Court ruled in this 2017 case that the primary commitment of the main contractor is to pay the contract price. Both the contract price and any additional costs usually are due to payment before the conclusion of the construction project. On the other hand, the Supreme Court ruled that the general terms and conditions are to be followed by both parties. The terms state that if one party neglects to present any claims as per the general terms and conditions they lose their locus standi (standing). Nevertheless, the general terms and conditions do not state that claims presented before the final account should be held premature.
The final financial account is meant to define which claims by the parties are in conflict. The goal of the account is that only disputed claims are processed at a trial. If a complaint is filed before the final account both disputed and undisputed claims end up in a court. The Supreme Court ruled in conclusion that the right to collect a debt is an essential part of the Finnish legal system. Particularly, in longtime construction contracts the contractor’s standing would diminish if a disputed claim could not be filed at a court of law before the construction work is finished and both parties concluded their financial accounts. It is only reasonable that any limitation to the freedom to collect debt must be agreed specifically i.e. a reference to the general terms and conditions is not enough. On this basis the Supreme Court reversed the decisions by the District Court and the Court of Appeals and the case was remanded to the District Court.
We must mention that the case was filed already back in 2012. The case was remanded by the Supreme Court in 2017. The case proceeding was thus started over in a way. Had the subcontractor waited for the examination procedure for approval and final account the process probably would have been quicker and less costly.
We cannot draw conclusions from the decision that, in the future, bringing cases to a court before the final account would be problem free. The easiest and uncomplicated way is to wait until the examination procedure for approval (or voiding the contract) and the following final financial account have been both carried out.
English translation by Lasse Jelekäinen