Construction LawPublicationsPotential Disputes Under Common Construction Contract (1)

 

On 13 April 2020, the President Joko Widodo, issued Presidential Decree No. 12 of 2020 concerning the Determination of Corona Virus Pandemic Non-Natural Disaster as a National Disaster (“Presidential Decree No. 12/2020”). Since then, to grapple with the COVID-19 pandemic, the Government has implemented Large-Scale Social Restrictions (Pembatasan Sosial Berskala Besar or “PSBB”), which is a formal policy for a “social distancing” program in several provinces and/or cities in Indonesia. The implementation of “PSBB” is to mitigate the risk of the COVID-19 transmission, which has significantly impacted all areas of business, including the construction sector. Construction delays, variations, efficiency issues and exceeding costs can be some causes for disputes to arise in the construction project, which typically occurs between the Project Owner and the Contractor. This article is intended to overview the most common areas of potential disputes and the avoidance of disputes in the construction sector.

 

Standards of Contract

Under current Indonesian Law, construction contract is regulated under Article 47 – Article 51 of Law No. 2 of 2017 concerning Construction Services (“Construction Law”), and Article 75 – Article 83 of Government Regulation No. 22 of 2020 concerning Implementing Regulation of Law No. 2 of 2017 concerning Construction Services (“GR 22/2020”). Also, there are varieties of international standard for references such as FIDIC, JCT, NEC, and SIA. The parties involved are free to adapt to any of these standards, noting they are also compliant with the Construction Law and GR 22/2020.

 

7 Areas of Potential Disputes

1. Project related

Design errors

Design errors are errors in Architect’s construction documents that require replacement of already-built construction or equipment, with original materials most likely to be wasted. Design errors are inevitable in any construction projects and can negatively impact the cost, schedule and safety performance. Different types of design drawings may have varying degrees of design errors due to many factors such as unclear overviews of the designs,  lack of coordination processes, and human errors.  Civil engineers, both architects and contractors,  have a limited understanding of the importance of design errors that occur in construction phases. As design errors happen, the Project Owner usually sues in both the contract and the tort for the repair or replacement costs.

Inadequate/Incomplete Specifications

Signing a contract with incomplete specifications is a significant source of risk for the Project Owner and Contractor. Incomplete contract documents at the time of awarding the contract substantially increase the risk of project delays. Incomplete contract documents may lead to claims from the Contractor for an extension of time and additional compensation. When the Project Owner is reluctant to pay more for a project, a dispute arises.

Different Materials

The Project Owner may provide and must abide by a detailed material in the Contract which specifies the nature, brand, type, or quality of materials that the Contractor is making. If the Contractor proposes changes in material, all parties to the agreement should sign off on the changes in material selection, and a written update to the contract should be made. If the Contractor simply substitutes in different materials without the consent of the other contracting party, this could be considered a breach of contract. Even if the Project Owner does not specifically provide the details of material that must be used in a project, and the Contractor uses low-quality materials that are detrimental to the environment, under Article 60 paragraph (1) Construction Law, the Contractor is responsible for the use of the inadequate and unsafe materials.

Quality of the Construction

The quality of the construction is related to the above different materials. While a detailed contract should be drawn up to explain exactly what will be involved in the construction project, it is common for conflicts to arise as to whether the Contractor provides an appropriate standard of workmanship. Based on Article 59 paragraph (1) of the Construction Law, the Contractor must comply with the Standards for Security, Safety, Health and Sustainability.

When the Project Owner finds out that the Contractor provides substandard work with low-quality materials, this can result in a lawsuit against the Contractor who completes the work. If the Project Owner refuses to pay for work that the Project Owner believes to be substandard, this can result in the contractor filing a suit. The Contractor may sue the Project Owner due to the Project Owner’s refusal to make payment. In the Project Owner’s defense, the Project Owner does not pay the Contractor’s services because under Article 27 letter c Presidential Regulation Number 16 of 2018 concerning Procurement of Goods/Services  (“PR 16/2018”) payment is based on the stages of the product/output produced under the Contract.

Site Condition

It is possible that the site condition is eventually known to be different from the initial condition. For instance, a contractor figures out concealed conditions when they start working. Before signing the contract, the Contractor is usually given an opportunity to visit a project site for site inspection. The problems occur when the Project Owner refuses to provide access to critical portions of the prospective project site. As a result, if the Contract does not provide the Contractor with specific information on the site conditions, and the site condition is subsequently found out to be impeding the progress of work or requires more expensive engineering solutions, the Contractor will probably use different sites.

 

2. Scope of work

Change the scope of work

In every construction project, changes often take place, leading to what is known as a Contract Change Order. In accordance with Article 87 Paragraph (1) of Presidential Regulation No.52 of 2010 regarding Amendments to Contract, contract changes include:

  1. increasing or decreasing the volume of work specified in the contract;
  2. increasing and/or reducing types of work;
  3. changing the technical specifications of work accordingly with the field requirements; or
  4. changing the implementation schedule.

The impact of changes in the scope of work is probably the single most disputed issue in construction. Therefore, the contractual provisions governing changes must be both fair and effective to settle such matters. If anything is found to have not been compliant with the agreed terms, the subcontractor may circumvent the liabilities on their fault.

Tendering

Under Article 24 of the Construction Law, tendering is mandatory for projects funded by the government. Furthermore, under Article 62 paragraph (1) and (3) of Government Regulation No. 22 of 2020 on the Implementing Regulation of Law No. 2 of 2017 on Construction Services (“GR No. 22/2020”), tenders can be carried out electronically through Construction Services Information System. During the COVID-19 outbreak, the tender mechanism can be carried out online and offline. Under the Minister of Public Works and Housing (MPWH) Instruction No 02/IN/M/2020, the construction tender mechanism includes the following:

  1. Presence mechanism for procurement of goods/services for selecting working teams;
  2. An offline and/or online mechanism for implementing qualification of evidence;
  3. Mechanism for the implementation of clarification, negotiation and evaluation of the fairness of prices;
  4. Mechanism of assistance that is carried out online.

However, tender-related disputes may be due to incomplete tender information, unrealistic tender pricing, and fraud.

 

3. Schedule

Delay

Under Article 47 (1) letter g of the Construction Law, delay is specifically defined as a breach of contract (wanprestasi). Thus, a party who commits the delay is liable for the loss incurred. In times of uncertainty, however, an apparent impact of COVID-19 on construction projects is the delay and disruption of project activities, which will inevitably lead to disputes regarding Contractor’s claims for additional time and costs.

Notification and Report

Under Article 47 (1) letter b of the Construction Law, reporting must be addressed in the construction contract. Report on the construction works and/or construction consultancy must be in a written form containing the progress of the work. A dispute occurs when the Contractor submits false information on the Notification and Report Form.

Contract Period and Project Milestone

Contract period or duration must be addressed pursuant to Article 47 (1) letter b and c of the Construction Law. An event such as the COVID-19 pandemic may impact on design and construction contracts in a variety of ways, including impacts on supply chains, contractor workforces, and designer personnel. The pandemic is also likely to cause the Contractor to demand time extensions, delay damages, project disruptions and labor inefficiencies.

Time Extension

The impact of the pandemic requires suppliers and contractors to ask for additional time because of disrupted supply chains or laws prohibiting the gathering of people. In Indonesia, under Articles 1244 and 1245 of the Civil Code, a Contractor may be exempted from reimbursement of costs, losses and interest if it fails to fulfill its obligations under the Contract due to a force majeure. A dispute may arise if the Parties do not categorize a pandemic as a force majeure. As a result, the Contractor can be considered as a defaulting party as stipulated in Article 47 paragraph (1) letter g of the Construction Law.

 

Continue reading: Potential Disputes Under Common Construction Contract (2)

 


ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO as a Law Firm Jakarta assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo
dendi.adisuryo@adcolaw.com

Liza Mashita
liza@adcolaw.com

@2020 ADCO Law. All rights reserved.
This publication has been prepared by Nursanti Savitri Kireina for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.

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