Construction Contracts in Russia: Documentation & Litigation

 

April 17, 2022

BRACE ©

 

Under a construction contract, the contractor undertakes to build a specific facility or perform other construction work within the timeframe established by the contract at the customer's request. In turn, the customer undertakes to create the necessary conditions for the contractor to perform the work, accept the results, and pay the agreed price. Construction contracts are governed by Chapter 39 of the Civil Code of the Russian Federation (the "Civil Code") and various other laws and regulations regarding construction.

The formalization of a construction contract is mediated not only by the execution of a written document but also by numerous technical documents. The likelihood of a positive outcome in court depends on the correct maintenance and preparation of these documents. This article examines the documentation requirements for construction contracts and judicial protection in the event of disputes during the performance of work.

Form of a Construction Contract

As a general rule, parties must execute a construction contract in simple written form. This requirement stems from an analysis of Articles 159 and 161 of the Civil Code, which provide that transactions must be in writing unless the law allows for oral agreements. Since the law does not provide for oral construction contracts, they must be agreed upon in writing. Given the complexity of the subject matter, especially in commercial construction, the written formalization of the transaction is also necessitated by the practical need to regulate all issues between the parties.

At the same time, judicial authorities are moving away from a formalistic approach that requires construction contracts to be exclusively in writing when performance under the transaction has actually occurred. In cases involving such circumstances, courts hold that the customer must pay for the work actually performed. [1]

According to Clause 1 of Article 432 of the Civil Code, a contract is considered executed if the parties reach an agreement on all essential terms in the required form. Essential terms include the subject matter of the contract, terms specified by law or other legal acts as essential or necessary for contracts of a given type, and all terms upon which the parties must reach an agreement. Generally, for construction contracts, the essential terms are the subject matter (determination of the type and volume of work) and the deadlines for performance (Art. 708 of the Civil Code).

Under the rules of Article 431 of the Civil Code, if the content of a contract is unclear, the actual common intent of the parties must be ascertained, taking into account the purpose of the contract. This includes considering all relevant circumstances, such as negotiations and correspondence preceding the contract, established practices between the parties, business customs, and the subsequent conduct of the parties.

In the event of a dispute regarding contract execution, the court must evaluate circumstances and evidence in their entirety and interconnectedness in favor of preserving rather than annulling the obligation, based on the presumption of reasonableness and good faith of the participants in civil legal relations established by Article 10 of the Civil Code. Thus, if the parties failed to agree on an essential term but subsequently, through their actions in performing and accepting the contract, actually fulfilled such a term, the contract is considered executed.

Certainly, to avoid disputes regarding the recovery of the cost of performed work in court, it is mandatory to formalize a construction contract in writing. However, the absence of a written contract does not exempt the customer from paying for work actually performed by the contractor and accepted by the customer that has consumer value for the latter. If the customer possesses the result of the performed work, has no objections regarding the volume or quality, and can use the result, the absence of a contract cannot serve as a basis for exempting the customer from payment. In such cases, the funds due to the contractor are recoverable under the rules of unjust enrichment. Any other approach would fail to protect bona fide contractors who, having performed construction work, would be unable to receive payment. This, in turn, would create unjust enrichment for the customer, as they would acquire a useful result without equivalent consideration, contradicting the provisions of Chapter 60 of the Civil Code.

A necessary annex to a construction contract is the technical documentation and estimate, which define the subject matter and the cost — specifically, the specific volume and price of the work.

The contractor must carry out construction and related work in accordance with technical documentation defining the volume and content of the work, and the estimate defining the price. Furthermore, the essential terms of a construction contract include its subject matter, i.e., the construction result to be transferred to the customer upon completion. Notably, the absence of technical documentation does not prove that a construction contract was never executed. The lack of technical documentation approved in the prescribed manner is not an absolute ground for declaring a contract unexecuted. [2]

Pursuant to Article 743 of the Civil Code, technical documentation determines the volume, content, and other requirements for the work, thus defining the subject matter. If the result of the work can be determined within the contract (e.g., the construction of a specific facility), the parties have effectively agreed on the subject matter. It is worth noting that the mere absence of technical documentation is not an absolute basis for declaring a construction contract unexecuted.

The decisive factor is whether the subject matter was agreed upon in the contract in a manner that allows for the identification of the specific facility the parties intended to be the result of the contract.

In one specific case, the court noted that when signing the contract, the parties did not agree on an estimate determining the types and volumes of work. However, the parties stipulated that the contractor's duty was to perform construction work on a warehouse located at a specific address. After signing the contract, the parties proceeded with performance: the customer paid the invoices issued by the contractor and did not raise objections regarding the absence of an estimate. [3]

The contract price in a construction contract is not an essential term.[4] Under Article 709 of the Civil Code, if the parties have not agreed on a price, the rules of Clause 3 of Article 424 of the Civil Code apply, which provide for the application of a price usually charged under comparable circumstances for similar work.

In another case, in recovering the cost of work actually performed, the court stated that Clause 3 of Article 424 of the Civil Code provides that when a price is not specified in a contract for consideration and cannot be determined based on its terms, performance must be paid at the price usually charged for similar work under comparable circumstances. Although the parties did not agree on the price, the plaintiff calculated the cost using the base-index method with FSNB-2001 collections converted to current price levels using construction and installation work indices developed by the Regional Center for Pricing in Construction ("RCCS") for the relevant periods, which does not contradict current legislation. [5]

The deadline for performance is an essential term in a construction contract (Art. 708 of the Civil Code). [6] However, the failure to agree on this essential term, which may lead to the contract being declared unexecuted, does not give the customer an absolute right to refuse payment for work performed and accepted. In such a case, the customer's acceptance of the work constitutes unjust enrichment, and therefore, the performed work must be paid. [7]

Technical and Project Documentation

Technical documentation determines the volume, content, and other requirements for the work. In terms of volume and content, technical documentation is a set of documents including text, calculations, graphic materials, technical passports, certificates, logs, and other documents prepared, restored, maintained, and updated throughout the life cycle of the construction and operation of a real estate property.

Unless otherwise specified in the construction contract, it is presumed that the contractor must perform all work specified in the technical documentation and estimate. The contract must define the composition and content of the technical documentation and specify which party must provide it and by what deadline.

In the construction of real estate, technical documentation is typically represented by project documentation, which fully determines the volume and composition of construction work. Thus, technical documentation defines the subject matter of the contract — the scope of work to be performed under the agreement.

Project documentation is a specific type of technical documentation. The characteristics of construction work must be contained in the project documentation, which determines the volume and content of work, including architectural, functional-technological, structural, and engineering solutions to ensure construction and the reliability and safety of capital construction facilities (Art. 48 of the Town Planning Code of the Russian Federation).

Clause 3 of Article 743 of the Civil Code provides that if a contractor discovers work during construction that was not accounted for in the technical documentation, necessitating additional work and an increase in the estimate, the contractor must notify the customer. If the customer does not respond within 10 days (unless the law or contract provides otherwise), the contractor must suspend the relevant work, with the losses caused by the downtime charged to the customer. The customer is exempt from compensating for these losses if they prove that the additional work was unnecessary.

If the contractor fails to notify the customer, they lose the right to demand payment for additional work and compensation for losses, unless they can prove the necessity of immediate action in the customer's interest, such as when suspending work could lead to the destruction or damage of the construction facility.

As-Built Documentation in Construction Contracts

As-built documentation consists of text and graphic materials reflecting the actual implementation of project solutions and the actual position of capital construction facilities and their elements during construction, reconstruction, or major repairs as the work defined in the project documentation is completed. [8]

As-built documentation is maintained by the person performing the construction. It includes the text and graphic materials mentioned in this chapter, as well as:

a) as-built geodetic diagrams; b) as-built diagrams and profiles of utility network sections; c) certificates of testing and trial runs of technical devices and utility systems; d) results of expert examinations, inspections, and laboratory or other tests performed during construction control; e) documents confirming quality control of the construction materials used; f) other documents reflecting the actual implementation of project solutions.

The existence of as-built documentation is not only a necessary component of contract performance but also allows the real composition and volume of performed work to be determined in the event of a dispute. The list of as-built documentation and the procedure for its maintenance are established by regulations. [9]

Certificates of Completion in Construction Contracts

The acceptance of the results of work is formalized by certificates of completion. The delivery of work by the contractor and its acceptance by the customer are formalized by a certificate signed by both parties. If one party refuses to sign the certificate, a note to that effect is made, and the other party signs it (Art. 753 of the Civil Code).

A court may declare a unilateral certificate of acceptance or delivery invalid only if the reasons for the refusal to sign are deemed justified. A claim to invalidate a unilateral certificate is considered simultaneously with a lawsuit for the recovery of the cost of the work. [10]

A unilaterally executed certificate serves as evidence of the contractor's performance of obligations. If the customer refuses to pay, the court must consider the customer's arguments justifying their refusal to sign. Valid grounds for refusing to accept work include the discovery of defects that make the result impossible to use for the purpose specified in the contract and which cannot be remedied by the contractor or the customer.

Standardized Documents in Construction Documentation

The well-known standardized forms for certificates of completion (Form KS-2) and the statement of costs (Form KS-3) [11] are not mandatory methods for formalizing work.

Since January 1, 2013, the primary accounting document forms contained in albums of standardized forms are no longer mandatory. However, document forms established by authorized bodies pursuant to other federal laws (e.g., cash documents) remain mandatory. [12]

Thus, parties to a construction relationship may agree on a different form for certificates of completion. Nevertheless, since certificates of completion are primary accounting documents, any custom forms must contain all the necessary requisites for a primary document. [13]

Because KS-2 forms have been used for a long time, reflect all necessary information, and are generally based on estimate calculations that are easily integrated into the form, they offer advantages over custom-designed forms that may contain omissions or errors.

At the same time, the KS-2 form is not particularly convenient for certain types of work, such as design work, as it lacks sections for listing specific parts of project documentation.

Correspondence as an Element of Documentation

Correspondence between the parties is of immense importance during the performance of a contract. Furthermore, if the parties did not execute a single contract document, the exchange of letters may serve as evidence that a contract was executed if essential terms were agreed upon.

Correspondence may cover various aspects of contract performance:

• agreement on additional volumes of work;
• full or partial adjustment of the subject matter;
• clarification of the procedure for performance;
• agreement on the substitution of materials;
• notification of the suspension of work (if grounds exist);
• notification of circumstances preventing further performance;
• transfer of documentation (initial permits, as-built documentation);
• recording of defects in the performed work;
• interim certificates recording the volume of specific sections of work.

Correspondence often has a direct impact on determining essential terms (e.g., the start date may depend on the handover of the construction site, formalized by a certificate). In disputes, correspondence serves as vital evidence, and a failure to examine it may result in a case being remanded for a new trial.[14]

Legal Protection in Construction Contract Disputes

Disputes related to construction contracts can be categorized into the following groups:

1. Recovery of the cost of performed but unaccepted work.

Under Clause 1 of Article 711 of the Civil Code, unless the contract provides for advance payment, the customer must pay the contractor the agreed price after the final delivery of the results, provided the work was performed properly and on time (or early with the customer's consent).

Clause 8 of the Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 51 explains that the customer's obligation to pay arises upon the delivery of the work results. [15]

Under Clause 1 of Article 720 of the Civil Code, the customer must inspect and accept the work (or its result) within the timeframe and in the manner provided by the contract. Article 753 of the Civil Code provides that delivery and acceptance are formalized by a certificate signed by both parties. If one party refuses to sign, a note is made, and the other party signs. A court may declare a unilateral certificate invalid only if the motives for refusal are justified (Clause 4).

Thus, acceptance is the customer's duty, provided they receive a notice from the contractor regarding the readiness for delivery.

A construction contract relationship consists of mutual obligations: the contractor's obligation to perform quality work on time, and the customer's obligation to pay the contract price in the prescribed manner (Art. 328 of the Civil Code).

Clause 1 of Article 450.1 of the Civil Code provides that a right to unilateral termination may be exercised by the authorized party by notifying the other party. The contract terminates upon receipt of this notice.

Unilateral termination necessitates the reconciliation of mutual performances (the "balancing of mutual obligations") and the determination of the final duty of one party toward the other. This "balancing" (saldirovanie) arises from the nature of construction relationships and the mutual character of the main obligations. In the case of ongoing relationships or work performed in stages, the parties' relationship should be analyzed in full to determine the final balance.

At the same time, when evaluating work subject to payment, one must consider its consumer value. Current legislation does not provide an absolute right for a contractor to receive payment for a result that clearly lacks consumer value for the customer, particularly when the contractor's professional knowledge and statutory powers would have allowed them to prevent the poor-quality result. [16]

The performance of work is proven by certificates of completion, or, if the customer refuses to sign, by other evidence such as as-built documentation, correspondence, and indirect evidence (e.g., proof of purchasing necessary materials).

2. Recovery of the cost of additional work not provided for in the contract.

Clause 3 of Article 743 of the Civil Code provides that a contractor who discovers work not accounted for in the technical documentation that is additional and leads to an increase in the estimate must notify the customer. If the customer does not approve, the contractor must suspend the work. The customer may make changes to the technical documentation if the cost of the resulting additional work does not exceed 10% of the total estimate and does not change the nature of the work.

Revision of the estimate is also possible if the cost increased by at least 10% for reasons beyond the contractor's control. In one case, the court established that project documentation was changed during the work. The contractor performed the additional work according to the revised documentation, which received a positive state expert review, and delivered the result to the customer. The customer accepted the result, which had consumer value, and transferred it to a third party but failed to pay. [17]

The failure to properly agree on additional work will result in the dismissal of a claim. [18] According to the legal position in Clause 10 of Information Letter No. 51, a contractor who fails to notify the customer of the need for additional work is not entitled to demand payment, even if such work was included in an acceptance certificate signed by the customer's representative. This position is reflected in judicial practice. [19]

This means that when performing additional work, the contractor must notify the customer and agree on the cost and volume.

3. Disputes related to the quality of work.

The result of construction work must comply with the contract terms and mandatory requirements of Russian law. The existence of an acceptance certificate signed without objections does not prevent the customer from raising objections in court regarding the quality, volume, and cost of the work. [20]

Under Article 721 of the Civil Code, the quality of work must comply with the contract, or, if the contract is silent, with the requirements usually applied to such work. Unless otherwise provided, the result must possess the specified properties at the time of transfer and be fit for its intended use within a reasonable period.

The customer may assert claims regarding defects discovered during the warranty period. If the work was performed with deviations that degraded the result or with other defects making it unfit for use, the customer may, at their discretion, demand:

• gratuitous rectification of defects within a reasonable timeframe;
• a proportional reduction in the price;
• reimbursement of their own expenses for rectifying the defects, provided the contract grants the customer the right to do so.

The contractor may perform the work again for free instead of rectifying defects, while compensating the customer for losses caused by the delay. Under Clause 1 of Article 723 of the Civil Code, if the work has defects making it unfit for use, the customer may choose between the three remedies mentioned above.

The provision that expenses are reimbursed when the contract allows the customer to rectify defects is intended to protect the contractor from the customer changing the result without the contractor's involvement and to reduce the customer's expenses, as the original contractor is presumed to have full information and can remedy defects most cost-effectively.

Consequently, a customer is entitled to reimbursement for rectifying defects themselves or through a third party without first approaching the contractor only if the contract expressly provides for this right.

However, Clause 1 of Article 723 of the Civil Code cannot be interpreted as limiting the customer's right to reimbursement if they acted in good faith and attempted to involve the contractor (i.e., sent a demand to rectify defects within the prescribed or reasonable period), but the contractor evaded the duty. In such cases, the customer's expenses are subject to reimbursement. [21]

During disputes, a judicial construction expert examination is typically ordered to establish the quality of work. Under Clause 5 of Article 720 of the Civil Code, an expert examination must be ordered at the request of either party if a dispute arises regarding defects or their causes.

A plaintiff's disagreement with the methodology of the expert examination does not prove that the findings are erroneous. The expert is independent in determining the research methods, provided they allow for answers to the posed questions. [22]

Experts are usually asked questions about the volume, quality, and cost of the work, as well as the cost of bringing the result into compliance with the contract and the law.

The examination is conducted with a mandatory inspection of the subject matter and a study of the case files, including as-built documentation. The most valuable documents are the certificates of inspection of concealed work, as they certify work that cannot be detected visually.

4. Termination of a construction contract.

A contract may be terminated by agreement of the parties, through unilateral out-of-court termination, or through judicial proceedings. As provided by Clause 2 of Article 715 of the Civil Code, if the contractor does not start on time or performs so slowly that completion by the deadline is clearly impossible, the customer may terminate the contract and demand damages.

Under Clause 2 of Article 450.1 of the Civil Code, in the event of a permitted unilateral refusal, the contract is considered terminated or amended. Article 717 of the Civil Code stipulates that, unless otherwise provided, the customer may terminate the contract at any time before the result is delivered by paying the contractor for the portion of work performed before the notice was received. The customer must also compensate the contractor for losses caused by the termination, within the difference between the full price and the amount paid for the performed work.

Thus, Russian law provides two distinct grounds for a customer to refuse to perform a contract:

• due to a breach of obligations by the contractor;
• at any time, regardless of breaches, subject to mandatory compensation for the contractor's performed work.

In evaluating the lawfulness of a termination under Article 715 of the Civil Code, courts check:

• the justification for the refusal (existence of grounds);
• specific breaches by the contractor;
• the existence of consumer value in the work results for the customer. [23]

Notably, compensation for the contractor's expenses is not provided for by law when a contract is terminated based on a refusal under Clauses 2 and 3 of Article 715 of the Civil Code.[24]

5. Disputes regarding de facto construction relationships.

The absence of an executed contract does not deprive an interested party of the right to demand payment for the cost of work actually performed if that work was completed and has consumer value for the customer (Clause 2 of Information Letter No. 51).

Consequently, the absence of a standalone construction contract executed in the form required by law does not exempt the defendant from paying for work actually performed by the plaintiff and accepted by the defendant that has consumer value for the latter.

Pursuant to Clause 1 of Article 720 of the Civil Code, the customer must inspect and accept the work in the manner provided by the contract and immediately notify the contractor of any discovered deviations or defects.

The performance of work (services) is confirmed by signed universal transfer documents (UTDs) referring to the contract, statements of costs (Form KS-3), and equipment operation reports.

The acceptance of work by the defendant triggers the obligation to pay (Articles 711, 753 of the Civil Code; Clause 8 of Information Letter No. 51). Based on Clause 4 of Article 753 of the Civil Code, delivery and acceptance are formalized by a certificate signed by both parties. If one party refuses to sign, a note is made, and the other party signs. A court may declare a unilateral certificate invalid only if the motives for refusal are justified.

A unilateral certificate is evidence of performance; therefore, if the customer refuses to pay, the court must consider the customer's arguments justifying their refusal (Clause 14 of Information Letter No. 51). The law places the burden of proving the justification for the refusal to accept work on the customer. In the absence of reasoned objections, the certificate of delivery and acceptance is admissible evidence of the performance and acceptance of the work.

Furthermore, it is possible to recover the cost of work even in the absence of the original contract if a copy is available. In one case, the courts correctly concluded that although the plaintiff submitted a copy of the contract, the defendant failed to provide any other version. Given that the defendant did not deny the fact of the transaction, the contract was held to be executed. The absence of an original document does not prove that a contract was never executed. [25]

Moreover, following the legal position in the sixth paragraph of Clause 7 of Information Letter No. 165 dated February 25, 2014, and considering the content of the contract, electronic correspondence, and the fact that the parties proceeded with performance without disagreements, the courts concluded that de facto construction relationships were established. This was also confirmed by witness testimony and the fact that the customer accepted the terms by making a payment of 300,000 rubles.

In light of the above, the courts correctly determined that the general provisions of civil law and the specific rules of Chapter 37 of the Civil Code apply to these legal relationships.

Analyzing construction disputes, it is clear that most arise due to incomplete or incorrect documentation. Therefore, the correct preparation of the contract itself, as well as the necessary technical and as-built documentation, will help minimize the risk of judicial claims.

_______________________________

References

[1] Resolution of the Supreme Court of the Russian Federation dated June 9, 2020, No. 45-KG20-3, Case No. 2-1104/2019.

[2] Clause 5 of Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 51 dated January 24, 2000, Review of the Practice of Resolving Disputes Under Construction Contracts.

[3] Resolution of the Arbitration Court of the Volga-Vyatka District dated January 11, 2021, No. A79-9346/2020.

[4] Resolution of the Federal Arbitration Court of the Volga District dated March 18, 2008, No. A65-17612/07.

[5] Resolution of the Arbitration Court of the North-Western District dated July 27, 2015, No. A56-43932/2014.

[6] Resolution of the Arbitration Court of the West Siberian District dated July 5, 2015, No. A03-2441/2015.

[7] Resolution of the Arbitration Court of the North-Western District dated December 21, 2021, No. A56-46805/2019.

[8] See, for example, Order of Rostechnadzor No. 1128 dated December 26, 2006, On Approval and Implementation of Requirements for the Composition and Maintenance of As-Built Documentation During the Construction, Reconstruction, and Major Repair of Capital Construction Facilities and Requirements for Certificates of Inspection of Work, Structures, and Sections of Utility Networks.

[9] RD-11-02-2006; SP 48.13330.2019, Organization of Construction; SP 68.13330.2017.

[10] Clause 14 of Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 51 dated January 24, 2000, Review of the Practice of Resolving Disputes Under Construction Contracts.

[11] Approved in accordance with the Album of Standardized Forms of Primary Accounting Documentation for Accounting of Work in Capital Construction and Repair and Construction Work (forms approved by Resolution of the State Statistics Committee of the Russian Federation No. 100 dated November 11, 1999).

[12] Information of the Ministry of Finance of Russia No. PZ-10/2012, On the Entry into Force on January 1, 2013, of Federal Law No. 402-FZ dated December 6, 2011, On Accounting.

[13] Art. 9 of Federal Law No. 402-FZ dated December 6, 2011, On Accounting.

[1]4 Resolution of the Arbitration Court of the Volga District dated June 9, 2020, No. F06-61768/2020 in Case No. A12-18987/2019.

[15] Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 51 dated January 24, 2000, Review of the Practice of Resolving Disputes Under Construction Contracts.

[16] Resolution of the Arbitration Court of the North-Western District dated March 24, 2022, No. F07-19883/2021 in Case No. A56-102245/2020.

[17] Resolution of the Arbitration Court of the Volga-Vyatka District dated October 13, 2021, No. A79-1986/2020.

[18] Resolution of the Arbitration Court of the West Siberian District dated March 3, 2022, No. A03-17648/2020.

[19] Resolution of the Arbitration Court of the West Siberian District dated November 26, 2021, No. A45-4590/2021.

[20] Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 51 dated January 24, 2000.

[21] Question 1 of the Review of Judicial Practice of the Supreme Court of the Russian Federation No. 2 (2017) (approved by the Presidium of the Supreme Court of the Russian Federation on April 26, 2017).

[22] Resolution of the Arbitration Court of the West Siberian District dated April 7, 2022, No. A45-140/2021.

[23] Resolution of the Arbitration Court of the East Siberian District dated November 7, 2021, No. A19-7631/2019.

[24] Resolution of the Arbitration Court of the Moscow District dated December 16, 2021, No. A41-60035/2020.

[25] Resolution of the Arbitration Court of the Ural District dated April 5, 2022, No. A47-5703/2021.