Monday, 25 April 2022

Can the developer withhold invoiced amounts?

VolverThe volatility of a company's financial situation and the medium-term commitments it undertakes in construction contracts justify the guarantees that are often demanded by the developer at the time of contracting.

In addition to the provision of a bank guarantee, it is also common for the developer to safeguard its interests by retaining a percentage of the value of the invoices paid during the performance of the work, which is also intended to ensure the proper performance of the work and the liabilities resulting thereof, which continue until the final acceptance.

It is precisely on these guarantees, which have raised many disagreements, that this article will focus, given the requests for intervention that have been made to Belzuz Abogados, SLP – Portuguese Branch in this area and the need felt to clarify its "modus operandi".

The regime of civil construction contracts is provided for in the Civil Code, and the regime provided for in the Public Procurement Code does not apply to them, unless the parties so determine and expressly so provide.

As the principle of contractual freedom is in force in our legal system, the parties may configure their relationship and freely establish its contents, without prejudice to compliance with mandatory rules, as is the case, in the situation in question, of those related to liability for defective compliance.

And it is in this context that the introduction of contractual clauses establishing the retention of a percentage of the value of the invoiced work and to be paid by the developer, in civil construction contracts, arose, which would legally only apply to public works contracts.

However, withholding a percentage of the invoiced amount is a special guarantee of the obligations undertaken by the contractor, falling within the form of a deposit, which may be provided, as in this case, by a cash deposit.

Like the bank guarantee, it also assumes an identical nature in that it commits the guarantor – usually the Bank – to the payment of any compensation resulting from a potential breach or performance of the contractual obligations.

In these two cases, since they are both guarantee contracts, the Bank or the contractor itself undertakes, in whole or in part, the risk that arises for the other contracting party as a result of the performance of the company or the guarantee of a specific income or result.

Their great added value is that they are of an autonomous or independent nature and are not ancillary to the obligation they guarantee, which is to say that the fulfilment of the guarantee is not dependent on contractual changes. Is the understanding of our Courts that, even in cases of termination of the construction contract or insolvency/death of the contractor, the deposit does not expire, remaining in order to "perform its function" of guaranteeing the fulfilment of the obligations undertaken by the contractor.

The coexistence of these two guarantees throughout the performance of the contract, including the guarantee period for the construction work, or the replacement of one by the other is a question that must be answered on a case-by-case basis and in accordance with the clauses of the contract that the parties have established.

From our experience it is possible to conclude that withholding the invoiced amount, usually 5% to 10%, arises, as a rule, in conjunction with the provision of the bank guarantee, and is maintained until the final acceptance of the work, explicit or tacit, date on which the contractual obligations are extinguished. It is true that there are cases in which the withholding carried out by the developer on the invoiced amount is or may be, at the time of provisional acceptance, replaced by a bank guarantee of identical value, or even higher, which will remain during the term of the guarantee, after which it expires.

Belzuz Abogados SLP - Portuguese Branch has been dedicated to monitoring these matters for several years, advising its clients in the negotiation, formalisation and implementation of construction contracts and also in the resolution of legal disputes arising thereof.

 Catarina Duarte Catarina Duarte 

Litigation and Arbitration Law department | Portugal

 

Belzuz Abogados SLP

This publication contains general information not constitute a professional opinion or legal advice. © Belzuz SLP, all rights are reserved. Exploitation, reproduction, distribution, public communication and transformation all or part of this work, without written permission is prohibited Belzuz, SLP.

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