REALWorld Law

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

In Nigeria, common law principles and practices govern and regulate contracts for designs and building works. In a design or construction contract, the fundamentals of common law agreements, parties, intention, considerations etc. must be in place. Many states in Nigeria have laws regulating contracts and which laws are codifications of common law principles.

Designs and construction contracts due to their unique nature and technicalities, usually contain terms that are standard and reflect the agreed construction process in standard uniform forms.

There are a number of local regulations governing designs and building construction works in Nigeria. These regulations specify the designs and building standards which the owners/developers, architects and building contractors must comply with when undertaking the construction works.

Aside the standard forms, construction contracts must not contravene the provisions of the relevant laws contained in the Urban and Regional Planning and Development (Amendment) Laws, 2019, Lagos State Physical Permit Regulations 2019, Lagos State Building Control Agency Regulations 2019, National Building Code 2006, National Environmental Standards and Regulations Enforcement Agency Act 2018 (as amended), Environmental Impact Assessment Act 1992, Public Procurement Act 2007, and such other Federal and State legislations regulating the professionals engaged in the Construction Industry such as the Builders Registration Act Cap B13 LFN 2004, Engineers Registration Act 2019, Quantity Surveyors Act Cap Q1 LFN 2004 and Architects Registration Act Cap A19 LFN 2004.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

The Construction Industry is well regulated by laws which prescribe certain requirements for commencement of any development. The nature of the development or construction determines the process to be followed and the licence and approval required by a building or engineering contractor to commence work.

The permits and licenses required to commence a development construction include the following:

• Title and right of occupancy over the land upon which the development is to be constructed. This is mostly for private developments and may not be necessary for a public project on state land where the state is the sponsor;
• Relevant certifications from the appropriate statutory bodies must be obtained by the professionals (Engineers, Architects, Surveyors, Builders, etc.) involved in the construction process;
• Building design approvals and development permits from the appropriate state department/authority;
• Environmental Impact Assessment Clearance and Compliance permit;
• Relevant Fire, Health and Safety permits and licenses; and
• Sub-soil Investigation Report is required in the case of structure in excess of two (2) floors and all developments in areas with low bearing capacity soils.

Under the extant regulations, every building development or project construction requires the inspection by relevant technical officials and certifications of compliance on quality and approved specifications.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

There are statutory provisions that provide for health and safety in buildings whether during construction or after completion. The minimum legal requirements relating primarily to health safety and welfare of the workforce which must be considered in planning and execution of construction works are specified under regulations provided in laws such as the Labour Act Cap L1 LFN 2004, the Factories Act Cap F1 LFN 2004, the Employees Compensation Act 2010, Fire Service Regulation 2019, Corona Virus Disease (COVID-19) Health Protection Regulations, 2021, and the National Building Code 2006.

The health and safety rules and regulations prescribed under the relevant statutes do not only regulate health and safety in the construction process, but also stipulate minimum standards for the use of the developments after the construction. The Nigerian Social Insurance Trust Fund Management Board implements the Employees Compensation Act which makes provisions for compensation in cases of death, injuries, diseases and disability arising from employment.

The Factories Act enables the Inspectorate Department of the Federal Ministry of Labour and Productivity to enforce minimum standards and requirements of health and safety under the Act. There is currently a bill awaiting the assent of the President known as the Labour, Safety, Health, and Welfare Bill which seeks to repeal the Factories Act and when passed into law will provide a comprehensive Occupational Health and Safety Legislation in Nigeria.

Following the outbreak of COVID-19 in Nigeria, the Corona Virus Disease (COVID-19) Health Protection Regulations, 2021 was passed into law by the President of the Federal Republic of Nigeria to protect the health and wellbeing of all Nigerians. Part 1 of the COVID-19 Regulations mandates all persons to maintain physical distancing of at least 2 meters and that not more than 50 persons shall be in an enclosed place at a time. Part 2 of the Regulations further mandates all persons to wear mask, wash hands, and submit self for body temperature checks whenever accessing an establishment or workplace. Also, under the Regulations, employers or establishment owners are mandated to ensure compliance with provisions of the Regulations, failing which the offender will be liable on summary conviction to a fine or imprisonment term of six months or both.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

There are several environmental legislations enacted for the purpose of regulating and enforcing public policy on environmental protection and sustainability. The various States have specific environmental laws replicating the Federal Act with slight modifications. The environmental legislations in Nigeria include the Environmental Impact Assessment Act, the National Environmental Standards and Regulations Enforcement Agency Act (NESREA Act) and the Harmful Waste (Special Criminal Provisions,) Act 1998.

The National Environmental Standards and Regulations Enforcement Agency (NESREA) established under the NESREA Act has developed several Environmental Regulations targeted at particular areas of concern and published in the Federal Government Gazettes. More specific to the Construction sector, there is the National Environmental (Construction Sector) Regulations, which purpose is to regulate and minimize environmental hazards such as pollution from construction, decommissioning and demolition activities. Also, the National Building Code makes provisions for environmental issues relating to building construction.

At the Federal and the States levels, there are established specific government Ministries, Departments and Agencies tasked with oversight and implementation of environmental regulations.

In Lagos State, for example, there is the Environmental Management and Protection Law, 2017 with the Ministry of Environment and the Lagos State Environmental Protection Agency (LASEPA) responsible for enforcement of all policies on the environment.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Infrastructure and utility arrangements to support a new development are dependent on the project sponsor. Where the project is privately owned, the provision of infrastructures and utilities (roads, sewers etc.) are the responsibility of the owner/developer. The development of infrastructure is subject to layout design planning approvals showing the land and proposed infrastructure.

Where the project is a public sector initiative or a public-private partnership project, there are usually arrangements with the utility suppliers in relation to the necessary infrastructure required for the real estate development.

Infrastructure development should be in the contemplation of the project developers, and it is usual to liaise with the relevant utility companies in relation to obtaining connections such as electricity or water. Electricity generation and distribution have been the sole responsibility of a government-owned Corporation but currently liberalized with private sector involvement and other power generation companies participating. The developer has the option of connecting to the general power grid and making arrangements with the private power companies for the supply of energy.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Federal Government developments are subject to the Public Procurement Act 2007 which requires that certain contracts or procurements are to be approved by the Bureau of Public Procurement (BPP) except a waiver is obtained. One of the guidelines for the approval of contracts by the BPP is that they are governed by Nigerian law. If works are procured by a state government, the rules may differ in accordance with the respective states’ procurement law.

In the case of private sector developments, the parties are free to contract provided the general legal requirements of a valid contract are satisfied. There is a general duty of compliance with standards prescribed under the applicable laws and regulations and parties cannot agree to exclude the provisions of extant laws regulating design standards and the carrying out of building works. The terms that are implied by law include the contractor’s duty to carry out the construction works with proper skill and care; obligation to adhere to particular best standards; fitness for the expected purpose particularly as the employer relies on the contractor’s design skills; it must meet the standard imposed by regulations and codes.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Generally, payments are structured in phases or stages. The contractor upon completion of each phase submits an invoice for the works and the employer on confirmation of the works issues a certificate of completion whereupon the payment is made to the contractor.

The parties may agree on an advance payment to the contractor of a sum representing 10% of the total contract sum for mobilization and commencement of the works which is deducted from payments due to the contractor under the contract. Usually, there is provision for retention from each payment due to the contractor to rectify defects after completion of the project or paid back to the contractor upon certification by the employer’s architect that all defects have been rectified by the contractor.

This mode of payment may also be adopted for design consultants where their responsibilities run for the entire span of the project duration.

The responsibility of paying subcontractors is on the contractor and this is also structured in line with payments upon successful completion of each phase or stage of the works until completion of the specific subcontractors’ contractual obligations.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Construction contracts generally specify the duration of the contract and the date of completion of the contract and the contractor is expected to comply with this provision failing which he will be deemed to be in default except where the delay is caused by the employer or by a force majeure event in which case the contractor is excluded from liability.

Where the delay is caused by the employer, invariably the contractor should be entitled to an extension of time for completion. In the event that the delay is caused by the contractor, the employer is entitled to claim for extra costs and inconveniences arising therefrom against the contractor.

Construction contracts usually make provision for liquidated damages which are a means of compensating the employer when the contractor does not complete his works within a stipulated time agreed. Any extra time required to complete the project will result in a deduction at a predetermined rate under the contract calculated per day, week, or month that the works are delayed beyond the agreed completion date. There is a limit to the amount that can be claimed as liquidated damages and usually not exceeding a specific percentage of the total contract price.

Another option open to an employer where the contractor fails to deliver within the fixed time agreed by the parties or where there has been undue delay in the performance of the contract by the contractor, is that the employer may opt to rescind or cancel the contract.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Standard form construction contracts usually contain provisions that guide the parties’ relationship in the event that a variation is required and matters such as variations, the formalities, valuation of the works and payment for the variation works would be covered thereunder.

Generally, where the variation is authorized by the employer, the contractor is usually entitled to claim payments for the variation and may request for an extension of time to carry out the variation works. Unauthorized variations by the contractor will amount to a breach of contract for which damages are recoverable by the employer.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

The parties are at liberty to agree in their contract what events will amount to the completion of the construction works. However, this is generally implied to mean that the development is completed and fit for the intended purpose.

Upon completion of the construction works, the contractor will give notice that the works are complete and upon inspections carried out by the employer’s architect and satisfaction that the works are complete, a Certificate of Practical Completion is issued by the architect or engineer to the contractor certifying that the works are complete.

Under the relevant state’s Physical and Urban Planning law, there is a requirement that mandates the Contractor to obtain a stage certificate of satisfactory execution upon completion of each stage of construction. In addition to this, there is a requirement for the issuance of a Certification of Completion and Fitness for Habitation by the appropriate agency of the Government certifying the completion of the building works. The law empowers the Building Control department to issue a Certificate of Completion and Fitness for Habitation for all building developments and this is a legal requirement that cannot be waived by the parties under their contract.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

The Limitation of Actions Act 2004 (as amended) and the relevant States Limitation Laws prescribe the specific periods within which legal actions are to be commenced or instituted from when the injury or omission, causing the damage or loss, arose or occurred. The prescribed period for contracts under Sections 8 (1) (a) and 12 (1) (a) of the Limitation Law of Lagos State 2015 is six years for simple contracts and twelve years for contracts under seal (made by way of a Deed).

Typically, most construction contracts are made by way of deed. A claim for breach of the contract must be commenced within 12 years from the date the event giving rise to the breach occurred. In the event that the construction contract is not made by way of a deed, a simple contract, the limitation period is six years.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Upon completion of the building development, it is handed over to the employer who may, in turn, transfer the development to other end users. Depending on the nature of the relationship between the end-user and the employer, claims for damage to the property may be made either under contract or in tort.

Where a contractual relationship exists between the end-user and the employer, the employer is liable to the end-user for defects to the building and this liability may by agreement of the parties be limited to the defects liability period, the period within which any defects identified is to be made good. The end-user is entitled to claim damages against the employer for any loss accruing from such defects.

The parties may also by their contract exclude any liability for defects after hand over of the building development or may agree to adopt the liquidated damages approach by which the amount of the damages payable in the event of any defect is pre-determined at the commencement of the contract.

Where no contractual relationship exists between the end-user and the employer, the end-user cannot claim damages under contract but can sue the employer in an action in tort for breach of a duty of care in the construction of the building.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

There is no contractual liability on the part of the architect, contractor, engineer, and subcontractors in favour of the end-users. The end-user therefore cannot directly claim against an architect or contractor if there is no privity of contract between them.

Instances of liability may occur in tort where there is a breach of professional duty by the architect in the designing of the building project and which has occasioned damage and loss.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Third parties and end-users such as subsequent purchasers, lessees and perhaps financial institutions have no contract and cannot seek legal redress for contractual breaches against the architects, engineers and contractors of the designs and construction of the development.

The options towards affording some measure of protection for third parties can be by the Employer insisting on the following provisions:

• Obtaining specific collateral warranty contracts or agreements for a specified period. The purpose is to provide for a duty of care to be extended by the Architects, Engineers, and Contractors to a third party and therefore damages caused by defects are actionable.
• Step-in rights provision in the construction contract is for the benefit of the beneficiary to step into the role of the employer for the purpose of assuming the obligations and rights of the employer under the contract where a certain agreed event occurs.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

There is no court established by law in Nigeria specifically for the purpose of adjudication on construction disputes. Construction disputes being civil matters arising from contracts fall within the jurisdiction of the High Court of the state where the property or project is located.

The decision of the High Court can be appealed to the Court of Appeal and the decision of the Court of Appeal can also be appealed to the Supreme Court being the apex Court in Nigeria.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Most standard-form construction contracts in Nigeria provide for alternative dispute resolution by which the parties agree that any dispute between them shall first be settled amicably failing which the dispute shall be referred to arbitration or mediation for resolution. This avoids the costs and adversarial disadvantages of litigation. This is achieved by providing a clause or agreement in the construction contract to refer to arbitration for the resolution of disputes between the parties.

The Arbitration and Conciliation Act, Cap A18, Laws of the Federation of Nigeria, 2004 and other respective State’s Arbitration Laws make provisions for the processes and procedures for arbitral proceedings in Nigeria. The parties may agree on the specific locations and laws to govern and apply to them and generally, awards from foreign arbitral proceedings are enforceable in Nigeria.

In comparison to litigation in the High Courts, arbitration is a much faster and less cumbersome procedure of dispute resolution affording the parties a less formal, speedy, and flexible mechanism for resolution of their disputes. Generally, litigation involves a more complex and time-consuming process.

Last modified 22 Mar 2024

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

In Nigeria, parties are free to agree under their contract the dispute resolution options in the event of a dispute. Litigation or arbitration, making them an attractive option for construction disputes, which often involve complex technical and legal issues. It is usual for parties to a construction contract to prescribe alternative dispute resolution mechanisms such as mediation, conciliation, and arbitration. Where the parties elect to explore any of the alternative dispute resolution options, in the event of a dispute, they would be precluded from referring their disputes to the High Court.

In Lagos State, there is the Multi-Door Courthouse established by law and the Lagos Chamber of Commerce and Industry which provides alternative dispute resolution services and encourages parties as the first step in any litigation proceeding to explore amicable resolution and mediation.

Last modified 22 Mar 2024