There are different ways to ensure that liabilities are insured. Instead of the bond (see below), many contractors issue undated signed cheques of the pre-agreed value of total liability, to be used if there are problems. However, such large cheques often bounce when cashed. A foreign property developer recommends requesting many small cheques from the contractor, such as five THB 300,000 baht cheques rather than one THB 1.5 million cheque has worked well. Stuart adds that the contractor has to also issue a letter to the purchaser permitting the latter to date the cheque in the event of default under the contract.
A method Timothy advocates is that purchasers retain a fixed percentage, clearly written into the contract, of each payment.This “retention” is an element of the majority of standard construction contracts, and serves as insurance used by the purchaser towards the cost of repairing defects should the contractor fail to do so.
• Grounds for contract termination should be clearly indicated. If the purchaser has to contend with repeated breaches of poor workmanship,
sub-standard practices, or repeated missed deadlines, the purchaser might be rightfully
entitled to terminate the contract.
However, Timothy points out that a contract “ought to define breaches justifying termination, because where the contract says nothing it may be difficult to argue that even such a repeated or serious breach is fundamental, leaving the purchaser with a
never-ending battle.”
Stuart points out that it may not be wise to terminate in practice due to both the cost and time implications of termination, due diligence investigations of the contractor prior to appointment will assist in minimizing the risk of problems leading to termination.
Hidden and Added Costs
The contractors’ total price, the Bill of Quantity, is based on the purchaser’s blueprint. Depending on the size of the company, different types of additional fees are levied, plus the 7% VAT on the final tally.
• Larger companies often add a fixed ‘preliminary’ monthly expense to cover their overheads that are incurred but not directly related to construction costs, like office workers and labour camps. Negotiate for what costs should be in the preliminaries, and what can be billed as part of construction costs.
• The use of smaller companies might put a purchaser at risk of failure or shoddy workmanship and although the construction costs may initially be lower than larger firms, they may charge overhead and profits up to 15% of construction costs.
T
o guide us through the maze of Thai construction law, we tapped two experts who each possess 20 years’ experience: Timothy Taylor, Senior Property Specialist of renowned law firm, Tilleke & Gibbins International Phuket Ltd. who worked in Bangkok prior to Phuket, and Stuart Dugard, General Manager and Quantity Surveyor of G.E.S. Solutions Co., Ltd. who has worked in Thailand since 1995.
“Many problems in construction projects occur because there is no contract agreed between the parties, a contract has been taken from the internet which is inappropriate for the conditions, or a heavily modified standard form of contract is used. As a result, when problems occur, purchasers have little or no recourse,” Stuart says. Timothy concurs that contracts “particularly in this corner of the market are likely to be hand-crafted and of varying complexity” and points out that “the difficulty with individual construction contracts for the unwary purchaser may lie in what is missing, rather than what is there.”
Before Drafting a Construction Contract
Before drafting, Stuart exhorts purchasers “to seek specialist professional advice, either from a quantity surveyor or a construction lawyer. A normal lawyer may not be experienced in the intricacies of the construction industry and the details of construction law,” Stuart advises. He also says that his role is to make sure that the contract is also fair to the contractors, who “contrary to most people’s preconceptions, are not out there to cheat their clients.” Many projects that end up with problems can be linked to contracts “that are overtly onerous to the contractors causing disputes to occur.”
For projects of at least 30 million baht, it is worth considering a quantity surveyor’s full service (QS). For those with limited budgets, hiring a QS right from the start is best, particularly for drafting contracts and perhaps can serve as advisors subsequently. These professionals trained in construction, law and construction accounting can help keep costs within budget without sacrificing form and function.
Fundamentally, a contract is a legal means of making two parties understand each other. Therefore, the onus is on the purchaser to decide on the projects’ goals of the project and devise the best way to achieve it, Stuart says.
However, a fixed price contract eliminates negotiations and billing surprises.
Bank Guarantees and Bonds
These two instruments are similar in providing instant cash insurance payments if the contractor fails to perform. The key difference is the parties involved. Timothy explains that “a bank guarantee allows the bank to voice its opinion in disputes but it has to submit to the same forum of resolution, that is, to the jurisdiction of a Court or an arbitration.”
• Bank guarantees are cash pay-outs to purchasers if the contractor defaults on repairing a serious defect that he denies all responsibility for. In practice, Stuart has noted that banks rarely pay immediately and will investigate the case before disbursement to determine where the
fault lies.
• The most common bond is a “performance bond” on a contractor, called by the purchaser if the contractor becomes insolvent or fails to perform.
• Contractors can also request a bond from purchasers to insure against payment defaults.
Securing a bond costs 1.5% of the total bond value, which in turn is equal to 10% of the entire project value. So a THB 10 million project would have a THB 1 million bond and cost THB 15,000. The party footing the fee is subject to negotiation, though it is usually paid by the contractor and included within his preliminaries cost.
The best structure for both types of instrument is “on-demand” (unconditional), favouring the party which will be disadvantaged so payments are unequivocably disbursed. Instruments listing pre-requisite default events result in arguments as to whether a specified default has occurred, causes delay at best.
Ensuring Satisfactory Quality
Although many countries demand independent contractors and architects to serve as checks-and-balances, it is common that they are usually the same company in Thailand, particularly for smaller homes and projects. Since “local standards are not always international standards, and that is being polite,” Timothy advises engaging the services of a qualified architect or building surveyor to oversee construction, or an expert representative to ensure that best practices will be met.
Dispute Resolution
If a dispute between contractor and purchaser come to an impasse, what happens? Timothy says, “A well drafted dispute resolution clause should not only have the effect of describing what will happen, but have a positive role to play in dispute avoidance.”
Timothy says that an effective contract should include:
• A clause that construction will continue despite the existence
of dispute.
• Clauses that push for positive discussion “such as providing that the parties are obliged to give notice of any dispute and attempt to mutually resolve it within 14 days, or any reasonable measure that prevents a party rushing to court unnecessarily and without first having attempted some useful discussion”.
• An option allowing a mutually agreed independent third party to evaluate the situation
• An option for formal mediation
• If the dispute proves “intractable, a clause describing whether a dispute be dealt with privately in arbitration or publicly by the issue of Court proceedings should have been agreed”.
Based on Stuart’s practical experience in the Thai public and private sectors, he advises against taking the dispute too far because “enforcement of civil and arbitration awards are time consuming and costly.” A well-managed project he says, should “always keep the contractor and owner speaking. If you get overtly ‘contractual’ (always adhering to the contract), the risk of small disputes escalating is likely to increase.”
An example would be a standard clause stating that a ground for termination would be the hiring of a sub-contractor without prior notification to the purchaser. This clause is generally ignored if the project progresses according to plan. If the sub-contractor makes a mistake, the contractor is responsible for rectifying it. Thus a relatively dispute-free project occurs when all parties “try to anticipate and remove problems when drafting the contract. If problems occur, address them and move on.”
Contractor Insolvency
Lastly, to safeguard against contractor insolvency, these 6 clauses should be included:
Title for material and equipment
1) Material passes to the purchaser on the earlier of payment or delivery on site; therefore payment for material not delivered to the site should be avoided,
2) Title to the contractor’s equipment is given to the purchaser whilst on site;
3) Purchaser is entitled to safeguard the site upon contractor insolvency;
4) Liquidator cannot claim goods for the liquidation once title has been passed to the purchaser.
Termination
5) Contract automatically terminates upon contractor’s insolvency and that the purchaser has no obligation to make further payment;
6) Purchaser’s losses or damages are deducted from remaining sums due to the contractor.
Building one’s dream home(s) is undoubtedly one of the most rewarding and frustrating experiences for homeowners and real estate developers. Homework has to be done as to what are potential bad experiences of building one’s own home. Stuart says that the key is getting real cases from people who are truly knowledgeable, otherwise it is akin to the blind leading the blind.
As long as a sound construction contract is in place, which as Timothy says “must contain well written and easily administered clauses” it can help compensate for less than stellar contractors while limiting liabilities and mitigating foreseeable damages altogether.
Note: G.E.S. Solutions Co., Ltd.’s services do not include project management. G.E.S. provides professional independent and unbiased advice on how to fix problems. |
