During the past year, the Supreme Court and the country’s courts of appeal have examined a number of disputes linked to construction law. We have put together a compilation of some of the judgments that may be useful to be aware of.
CANCELLATION AND TERMINATION
A contractor had no right to terminate – the client was entitled to cancel
(Svea Court of Appeal, 24/02/2022, T 11970-19)
A contractor terminated its work pleading that the client had failed to pay invoices and also required the works to be carried out at a faster rate than the contractor considered practicable. As a result, the client cancelled the contract. The Court of Appeal found that the contractor had failed to show that any invoices that had fallen due had not actually been paid and the contractor therefore had no right to terminate on those grounds. Furthermore, the Court of Appeal stated that unreasonable demands from a client cannot in themselves confer a right to terminate. Since the works were already delayed and the contractor had itself stated through the termination that the works could not be carried out on time, it was clear, in the Court of Appeal’s view, that the contractor had not completed its work on time. The client was therefore entitled to cancel.
The ruling highlights the risks of cancellation. It is not uncommon for the parties to disagree on whether the timetable is practicable. Even though the client’s expectations may seem unrealistic, the starting point is the fact that the contractor must do what is possible. In such a situation, the contractor could possibly be entitled to an extension of time or compensation for acceleration of work.
Right to cancel including in the event of a delay, not just in the event of an expected delay
(Svea Court of Appeal, 10/06/2022, T 8169-19)
A construction had still not been completed seven months after the end of the contract period. The client therefore cancelled the contract. The question then was whether the cancellation was permissible under Chapter 8, section 1, p. 1 of ABT 06, which states that the right to cancellation exists if “the contract has been delayed so that it obviously cannot be completed within the contract period”, i.e. in the event of an expected delay. The Court of Appeal ruled that a delay occurring could also give a right to cancellation.
The Court of Appeal found that the contractor had no right to an extension of time (see the account below under the heading “Contractual clauses of different types”). The question then was whether the delay caused significant inconvenience to the client. Here, the Court of Appeal first found that there was no requirement for so-called “visibility”. The right to cancel can therefore exist even if the circumstances causing significant inconvenience are not visible to the contractor. According to the Court of Appeal, the delay caused significant inconvenience to the client. The fact that a great deal of work remained to be done even at the moment of cancellation (approximately another six months) and the fact that this caused inconvenience, since the sports halls that were to be built could not be used in time, were extremely important factors in this assessment.
This judgment therefore highlights several interesting questions relating to cancellation, particularly for contracts subject to delay. These include the fact that the cancellation provision in question also applies to delays occurring, where the limit for significant inconvenience lies and the fact that the contractor is not required to be able to see the essential factors enabling the client to cancel.
Is it possible to cite a new ground for cancellation retrospectively?
(Svea Court of Appeal, judgment 10/11/2022, T 3317-21)
A client cancelled a construction contract. The ground stated in the document of cancellation consisted of the fact that there were faults in the lime slakers produced by the contractor. At a later stage, the client also claimed delay as a ground for the cancellation. No impediment to citing a further ground for cancellation was therefore considered to exist. However, the Court of Appeal found that the client had failed to show the existence of either of those two grounds.
The client’s unjustified cancellation therefore entitled the contractor to cancel and be awarded damages. The contractor was entitled to an amount equivalent to the budget offer for the remaining work and a contractor’s fee of eight per cent, i.e. the payment that the contractor would have received had the contract been fulfilled.
This judgment provides an additional guiding rule in the contentious issue of citing new grounds for cancellation. The jurisprudential literature contains differing opinions and even the courts have to some extent judged the matter differently. However, the circumstances of the individual case are, as always, of crucial importance, which is why the party cancelling must nevertheless try to be as detailed and comprehensive as possible when stating the grounds.
LIABILITY FOR DAMAGES IN ACCORDANCE WITH THE ENVIRONMENTAL CODE
The owner of a neighbouring property was entitled to receive damages in the case of drilling for geothermal heating
(The Supreme Court, NJA 2022, p. 303.)
A contractor carried out drilling work for geothermal heating on a property. In conjunction with the drilling, pressure occurred in an old borehole on the neighbouring property, which led to soil and clay spraying up and making a building dirty. The question at the Supreme Court was whether the contractor was liable for damages for this in accordance with Chapter 32 of the Environmental Code, which stipulates strict liability for the party causing the damage (which means that the injured party does not need to prove that the party causing the damage was negligent). That chapter lists seven specific types of disruption along with “other similar disruption” in an eighth point. Drilling work or changes in pressure are not included in the seven points, but the Supreme Court nevertheless considered that they could constitute “other similar disruption.” The fact that drilling in geothermal heating constitutes an activity that is hazardous to the environment as well as the fact that changes in pressure were something to be expected in the activity then became significant. Because the damage due to pressure was an expected consequence of the drilling and the disruption should not reasonably have been tolerated, the contractor was held to be liable for damages.
With this court case, the Supreme Court has provided important guidance for what “other similar disruption” may be considered to mean. It is not inconceivable that case law on the term will be further developed in the land and environment courts of appeal. The court case can be seen as a reminder to both contractors and developers of the risks associated with some construction projects. In this context, it may also be mentioned that, in accordance with Chapter 5, section 13 of AB 04, the client is liable vis-à-vis the contractor for the obligation to pay damages that the contractor has incurred vis-à-vis a third party in accordance with Chapter 32 of the Environmental Code, provided that the contractor can show that it could not reasonably have prevented or limited the damage. In other words, in a situation of this kind, the contractor may possibly be able to escape liability for costs.
A restaurant received millions in damages due to construction noise, etc.
(Land and Environment Court of Appeal, judgment 18/01/2022, M 13114-20)
A restaurant beside Slussen in Stockholm brought an action for damages against the City of Stockholm due to extensive construction work being carried out in the area on behalf of the City. The restaurant claimed that its turnover had decreased as a result of noise and tremors, various forms of restrictions/disruptions to access and the fact that the landscape around the restaurant had been rendered unsightly. The Land and Environment Court of Appeal considered that the noise and tremors – which constitute specified damages in accordance with Chapter 32 of the Environmental Code – had occurred and that the disruption to access (in the form of vehicles, public transport and pedestrians being forced to take detours to reach the main entrance) had occurred and constituted “other similar disruption”. Rendering the landscape unsightly was, on the other hand, not considered to constitute a disruption. However, the court found that the noise, tremors and disruption to access had had an adverse effect on the restaurant’s turnover. This was specifically determined at approximately SEK 18.5 million over a three-year period. The City was therefore required to compensate the restaurant for that cost.
This ruling is also a reminder of the liability that construction may give rise to in relation to its surroundings. The ruling shows what can constitute a disruption that forms the grounds for damages (noise, tremors and limitations to access), as well as the fact that the boundary does not stretch infinitely (rendering the landscape unsightly).
TENANCY LAW ISSUES
A tenant received a rent reduction when a final decision was delayed
(The Supreme Court, NJA 2022, p. 188.)
At the time of a conversion, the tenants agreed to move temporarily to other accommodation that they had arranged themselves. The landlord informed the tenants that their communal apartments would be ready for occupancy in July, but the local building committee did not issue final notification until May the following year. Since the works were subject to an obligation to notify under the Planning and Building Act, the building could not be put to use in the period between the starting clearance and the final notification.. The tenants did not pay rent during the period in which there was no final notification and the landlord brought an action for that reason.
Tenancy legislation contains provisions on the right to a rent reduction in the event that an authority has issued a prohibition on the use of all or part of an apartment or premises due to their condition. According to the Supreme Court, the final notification would be equated with a decision by an authority prohibiting use, i.e. despite the fact that the final notification was not issued due to the condition of the apartments and that the decision was not aimed directly at the landlord. Because the prohibition on use gave rise to obstacles for and detriment to the tenants, they were therefore entitled to a full rent reduction during the period.
This court case has clarified the relationship between, on the one hand, the property owner’s obligations as a developer in accordance with the Planning and Building Act (vis-à-vis the general public) and, on the other, the property owner’s obligations as a landlord vis-à-vis its tenants. The risk of a rent reduction is therefore something that may be worth taking into consideration in some project calculations.
DAMAGES AND NEGLIGENCE
Direct claim between insurance companies regarding damage caused by a contractor
(Göta Court of Appeal, judgment 25/03/2022, T 936-21)
Fire damage occurred in construction work. The client received compensation from its insurer. The contractor, on the other hand, received no compensation from its insurer. After the contractor had been declared bankrupt, the client’s insurer chose to file a so-called direct claim against the contractor’s insurer. The direct claim was permitted and was successful.
It may be useful to be aware of the option of filing such direct claims, particularly in situations in which the other party has been declared bankrupt or may otherwise be considered to have payment difficulties. The ruling can also be seen in the light of a well-known court case from last year regarding assignment of a claim (NJA 2021 p. 622). In that case, it the client’s insurance company, after assignment of the claim from the main contractor, was permitted to file a claim directly against a subcontractor that was liable for the damage in question.
Lack of clarity and contradictions do not in themselves mean that a consultant has been negligent
(Svea Court of Appeal, judgment 17/03/2022, T 3141-20)
A client brought an action for damages against its consultant, citing various defects in the construction documents produced by the consultant. ABK 09 had been agreed between the client and the consultant. The Court of Appeal dismissed the action. It was true that the design was unclear in some respects and deviated from recommendations in installation manuals, but the consultant was not considered to have been negligent.
The ruling is a reminder of the difficulty of holding a consultant liable: a specific, tangible deviation from a standard of prudence must be proved in each individual case. As in this case, different experts may think differently and the uncertainty is then typically passed back to the client, who has the main burden of proof.
Is the contract approved even without a final inspection, and has a claim for damages been filed in time?
(Svea Court of Appeal, judgment 30/11/2022, T 795-21)
The question in the case was whether the client had filed its claim for damages within the prescribed period with regard to damage that appeared during the time for completion, i.e. within three months from the end of the time for completion (in accordance with ABT 06 Chapter 5, section 21). The starting point is that the time for completion expires when a final inspection has been passed (ABT 06 Chapter 7, section 12). However, no final inspection was carried out. The client had nevertheless made the final payment when its own organisation confirmed that the work had been completed. The contractor had left the area at the time of the final payment. The Court of Appeal found that, due to their behaviour, the parties could be considered to have agreed that the work would be handed over by means other than through a final inspection (ABT 06 Chapter 7, section 12, final paragraph). The final payment was thus to be regarded as approval by an inspector.
Around one year later, the client filed a specific claim for damages regarding water damage. The claim was filed too late. The client nevertheless claimed that an email sent shortly before the final payment would be considered to constitute a claim for damages. The email was sent by the client’s insurance company to the contractor’s insurance company and stated that the insurance company would “initially settle the damage on [the client’s] insurance and, after the cost has been added up, come back with a specified claim for damages.” According to the Court of Appeal, it was not clear whether a claim for damages had been filed against the contractor or, if so, what the basis for the claim was. The fact that it had not been shown that the contractor’s insurance company had been tasked with defending the contractor should also be taken into consideration. Overall, therefore, the Court of Appeal held that the email did not constitute a claim for damages.
That ruling illustrates how the way in which parties deal with a situation can have legal significance and how important it is for them to convey their position to the other party. Here, the final payment led to the consequence of the construction being considered to have been handed over, despite the fact that no final inspection had been carried out. No claim was then filed until a year later. The email that had been sent prior to that was not sufficiently clear. In accordance with case law in later years (and another case from this year, see below), the ruling confirms that it is necessary for the sake of security to clearly state that damages are being claimed and therefore not merely that they will or may be claimed. The circumstances on which the claim is based should also be clearly stated.
Another ruling on how clear a claim for damages must be
(Göta Court of Appeal, judgment 23/05/2022, T 4319-21)
In a consulting dispute, with ABK 09 as the standard terms and conditions, the question arose of whether the client’s email constituted a claim for damages (and therefore whether a claim had been filed within the prescribed period in accordance with ABK 09, Chapter 5, section 6). Neither the header nor the text of the email indicated that it was a question of a claim for damages. Instead, the email read: “If, according to the assessment, there are inaccuracies in the documents, we will contact you so we can work together to find a solution for settlement of the additional costs charged to the project.” According to the Court of Appeal, the email almost left open the question of whether or not a claim would be filed. The Court of Appeal therefore considered that the email did not constitute a claim for damages under the ABK provision.
Like the previous judgment, this judgment highlights the importance of clarity and, along with earlier case law, provides guidance on how a claim for damages should be formulated.
DIFFERENT TYPES OF CONTRACTUAL CLAUSES
A turnkey contractor was liable for existing conditions and therefore for delay
(Svea Court of Appeal, 10/06/2022, T 8169-19)
In the case referred to above concerning cancellation due to a delay occurring, the question of whether the contractor was entitled to an extension of time as a result of the structural design of the heating facility also arose. The question in dispute was whether the structural design condition “Maximum energy output from borehole 140 kW/m, Borehole, year” in the framework description constituted a location or state of affairs for which the client was liable in accordance with ABT 06, Chapter 1, section 6. The contractor had assumed that it was possible to achieve an output of 140 kW/m from the borehole. However, this was not the case and the construction work was consequently delayed by the fact that the contractor needed to determine the output value and adapt its work accordingly.
By means of an amendment to Chapter 1, section 6 of ABT 06, the contractor had been made to assume “all liability for existing conditions”. The administrative regulations stated that the contractor should have carried out a site visit to make itself aware of conditions that could affect the performance of the construction work and the costs of it. According to the Court of Appeal, these formulations mean that the client issued a disclaimer from liability for the site conditions and that the contractor was thus required to form a perception of the possible energy output. That obligation would also be seen in the light of Chapter 1, section 9 of ABT 06, which states that the contractor must carry out a professional assessment if there is no information on the work area at the moment when the tender is submitted. The Court of Appeal considered that the contractor had failed to fulfil that obligation. That means that delays caused by the borehole’s energy output became attributed to the contractor, which was therefore granted no right to an extension of time.
The ruling is a reminder of the importance of a clear division of liabilities when drafting a contract. When, as here, the contractor has assumed liability for the site conditions, it is accompanied by considerable liability for securing those conditions.
Prime cost is not the same as reasonable price
(Svea Court of Appeal, judgment 23/11/2022, T 681-21)
In a consumer contract in which the parties had agreed on compensation according to the prime cost principle, a dispute arose concerning, among other things, whether the price was reasonable. The contractor argued that the price invoiced was reasonable because it corresponded to the prime cost for subcontractors and suppliers, for example. The Court of Appeal did not accept this approach, but considered that it is necessary to prove that the price is reasonable in each individual case. That implies that the entrepreneur must take the interests of the consumer into consideration when choosing subcontractors and materials and that it must be possible to assess whether the payment to the subcontractor is reasonable. According to the Court of Appeal, the investigation was not enough to prove that the price was reasonable. The contractor’s claim for compensation was therefore not upheld.
This ruling is not just relevant to consumer contracts, where section 36 of the Consumer Services Act contains an express provision on the reasonableness of the price. The developments in sprawling Court of Appeal case law in recent years show that even construction contracts between traders using AB/ABT as a basis are likely to need to take general principles on reasonable price into consideration (e.g. by analogy with section 45 of the Sales Act). The fact that a particular price or payment model has been agreed does not necessarily discharge the contractor from the obligation to show that the price is reasonable. This applies in particular to numbers of hours in the case of payment according to the prime cost principle. In this context, it may be stated that there is also a provision in Chapter 6, section 10 p 3 AB/ABT which stipulates that the contractor must, as a general rule, invite tenders from multiple suppliers and subcontractors when procuring materials or subcontracting.
(Svea Court of Appeal, judgment 01/06/2022, T 13768-20)
A public authority and a real-estate company entered into a lease agreement. The premises would undergo a major conversion and would be adapted to the public authority’s (the tenant’s) activities. The adaptations would be paid for by the public authority, but the real estate company (the landlord) would procure them. The real-estate company therefore procured a contractor for the work. After the real-estate company issued invoices relating to the work, the public authority contested the invoices on the grounds that the real-estate company was the authority’s supplier (agent) in relation to the contractor and was therefore required to report the work to the authority. Since no reports had been issued, the public authority argued that the real-estate company was not entitled to receive payment for the work. The Court of Appeal ruled in favour of the real-estate company. It was not a question of an agency relationship with the authority. Instead, the conversion was a joint project in which the parties had mutual undertakings and had distributed the tasks between them.
One further question in the case was whether the real-estate company had proved the costs. The real-estate company had attached the contractor’s invoices as supporting documentation to the invoice, but did not have access to invoices from the subcontractor. Nevertheless, the real-estate company cited expert evidence with regard to whether the costs were reasonable. The Court of Appeal found the evidence to be sufficient and awarded the amount requested by the company. According to the Court of Appeal, nothing else had been agreed and it was reasonable to allow the public authority’s payment obligation to be founded on an investigation other than the specific invoice documentation that had been requested.
The ruling highlights the importance of clear contractual regulation in the event that a party to an agreement wants a specific arrangement. This applied, for example, to the argument that an agency relationship existed as well as to the objection that the subcontractor’s invoices needed to be presented.