Obtaining decisions and permits: What can be demanded of a FIDIC contractor?
The contractual division of duties to obtain decisions and permits does not change the principle that the investor is basically required to cover the costs of obtaining them. Nor can a division contrary to law be imposed on the contractor.
This division of duties follows from clause 1.13 of the General Conditions of Contract published by the International Federation of Consulting Engineers—Plant and Design-Build Contract (known as the “FIDIC Yellow Book”). The investor (referred to in FIDIC parlance as the Employer) is responsible for obtaining planning permissions (“the Employer shall have obtained (or shall obtain) the planning, zoning or similar permission for the Permanent Works, and any other permissions described in the Specification as having been (or being) obtained by the Employer”), while the contractor is responsible for obtaining other permissions (“the Contractor shall give all notices, pay all taxes, duties and fees, and obtain all permits, licences and approvals, as required by the Laws in relation to the design,execution and completion of the Works and the remedying of any defects”).
The parties to contracts in Poland based on FIDIC forms may establish this division differently and modify clause 1.13 to suit their needs in the Particular Conditions of the contract. But when deciding on modifications of this division, it is important to ensure that the division is clear and also in compliance with Polish law.
Does the contractor bear the cost of obtaining licences and permits?
The Construction Law of 7 July 1994 does not impose on the contractor the obligation to incur the costs of obtaining administrative decisions issued during the construction process. Under the Construction Law, all such obligations are borne by the investor. As a rule the contractor is not a party to these administrative proceedings, but only represents the investor.
When it comes to environmental licences and permits, the duties arising under the Environmental Protection Law of 27 April 2001 are primarily addressed to the investor, as the contractor exploits the environment only to the extent determined by conducting construction work. In addition, the contractor’s participation in the project ends upon acceptance (under the FIDIC terms, upon issuance of the Taking-Over Certificate), when the investor takes over the project for operation.
The “polluter pays” principle stated in Art. 7 of the Environmental Protection Law is also of fundamental importance. This principle is followed in the Environmental Protection Law when imposing remedial and preventive duties. Consequently, the entity whose activity is connected with the possibility of environmental contamination bears the costs of preventing such contamination.
Thus it is the investor that bears all obligations arising under the Environmental Protection Law and earlier obtained decisions concerning operation of the facility, in particular to begin or cease actions to maintain or restore the balance of nature and counteract contamination.
Similar rules apply to connection of the facility to utilities—power, heat, gas, telecommunications and so on. In order to connect to a network the entity seeking the connection is typically required to file an application for establishment of the conditions for the connection. Thus the entity required to pay the fee for the connection is firstly the entity that is applying for the connection. This entity can only be one holding legal title to use the facility (e.g. the owner, lessee or tenant) where the equipment and installations connected to the network will be used, i.e. the investor.
Thus if the parties do not expressly provide in their contract (particularly in clause 1.13) that the contractor takes over from the investor the obligation to cover the costs of administrative proceedings (or other indicated costs), imposing on the contractor the duty to obtain certain licences and permits is not the same as imposing on the contractor a duty to bear the costs connected with obtaining them.
If this obligation is imposed on the contractor, the investor should be sure it is expressed in the contract precisely. Under Polish law, doubts should be resolved applying the canons of contract interpretation, including Civil Code Art. 65 §2, and if that is not sufficient doubts will be construed against the party that drafted the contract. In contracts awarded through public procurement procedures, the rule is more explicit. Under Art. 29(1) of the Public Procurement Law of 29 January 2004, the contracting authority is required to describe the subject of the procurement unequivocally and exhaustively, using sufficiently precise and understandable terms, reflecting all of the requirements and circumstances that may influence the preparation of tenders. It is therefore the contracting authority that is responsible for the accuracy and completeness of the description of the subject of the procurement, and the contractor cannot suffer negative consequences because the description is imprecise. For this reason as well, if the contracting authority presents a description of the procurement that is too brief or imprecise, the contracting authority must bear the negative consequences of the contractor’s failure to include in its tender all of the elements the contracting authority expected.
Modification of clause 1.13
The ability to modify the duties of the investor and the contractor to obtain licences and permits is not unlimited. A limit on freedom of contract is the inability to affect the situation of other entities that are not parties to the contract, and the inability to influence the tasks and competencies of public authorities. The contract cannot modify or avoid obligations or prohibitions arising under universally applicable law (unless permitted by the law).
These limitations are particularly relevant in the case of construction projects. Laws regulating the construction process impose a series of obligations on investors and contractors which cannot be waived or shifted in time.
Nonetheless, the investor sometimes makes the contractor’s obtaining of certain licences and permits dependent on prior performance of certain works or taking other actions. In particular, the investor may try to require the contractor to obtain an occupancy permit before conducting “tests on completion.” Introducing such an obligation into the contract is tied to a concern about financial penalties being assessed against the investor by construction supervision authorities for operating the facility without a permit, as it sometimes happens that the authorities impose such penalties without first examining whether the start-up for purposes of conducting tests on completion constituted actual use of the facility.
A condition for issuing an occupancy permit is verification by the construction supervision inspector that the construction was carried out in compliance with the conditions set forth in the building permit. For this purpose, the inspector will first analyse the application for issuance of the occupancy permit and subsequently conduct a mandatory inspection of the facility.
Under Art. 57(1)(4) of the Construction Law, the investor is required to enclose protocols of tests and verifications with the application for the occupancy permit. The purpose is to show that all of the elements that will be verified in the inspection were performed in compliance with the building permit. Proper preparation of the protocols requires prior verification of the structure, which cannot be done without start-up and testing of specific elements of the installation. This occurs most often during tests on completion, defined in FIDIC clause 1.1.3.4 as tests carried out under clause 9 before the works or a section (as the case may be) are taken over by the Employer.
Therefore, a provision preventing such tests from being conducted before obtaining an occupancy permit, when the tests are necessary to apply for the occupancy permit, is contrary to law and has no place whatsoever in the contract.
If such a clause nonetheless appears in the contract, the parties may follow the procedure for contract amendment set forth in clause 13 of the FIDIC terms (Variations and Adjustments), and remove that provisions or modify it to bring it into compliance with the requirements of the Construction Law.
Use of the amendment procedure requires the agreement of both parties to the contract. But if the investor refuses, that does not mean that the contractor must follow a contract that is contrary to universally applicable law. In that situation, the contractor is not only not required to comply with the defective section of the contract, but must not comply with it.
First, if the contractor did comply with such a provision, it would expose itself and the investor to liability for acting against the law. Second, in that case grounds for the contractual liability of the contractor may not arise. Civil Code Art. 58 §1 provides for the invalidity of an act taken contrary to law, while Civil Code Art. 387 §1 provides for the sanction of invalidity also for imposing an obligation on the other party that is impossible to perform (which is how including in a contract a duty that is contrary to applicable law may be regarded).
Natalia Rutkowska, Infrastructure, Transport, and Public Procurement & Public-Private Partnership practices, Wardyński & Partners
