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 Portugal the execution of public works is governed by Decree-Law No. 18/2008, of 29 January 2008, which enacted the Public Contracts Code (Código dos Contratos Públicos), as amended. Construction works that are procured by private (non-public sector) entities are governed by the Civil Code, enacted by Decree-Law No. 47344, of 25 November 1966 (Código Civil), as amended.

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 general any construction activity can only be undertaken by the contractor if he holds a contractor issued by the Institute for Public and Private Construction and Real Estate (IMPIC, IP) and in accordance with the type and the value of works that the relevant permit allows. This contractor, which is valid for an unlimited time, is issued in accordance with Law No. 41/2015, of 3 June 2015, as amended.

Some non-relevant works can be undertaken by the contractor if it holds a simple registration certificate issued electronically by IMPIC, IP, which is also valid for an unlimited time period.

Furthermore, in general terms, the construction of a building itself must be authorized by the municipality before the contractor can initiate any. The construction works.

As stated in the Legal Framework for Urbanization and Building (Regime Jurídico da Urbanização e Edificação), and taking into account the recent changes dictated by the Decree-Law No. 10/2024, of 8 January 2024, the starting of any construction activity (whereas a prior licensing procedure is applicable) is no longer dependent on the issuance of a construction permit, which is nowadays replaced by the receipt of payment of the legally required licensing fees.

The circumstances in which works carried out by the public sector do not need prior authorization have been increased by the Decree-Law No. 10/2024, of 8 January 2024. Amongst others, works carried out by the State, public institutes, universities, state enterprise sector for equipment and infrastructure regarding the State´s public housing do not require a prior authorization.

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 Portugal, the main statutes that govern health & safety matters on construction sites are:

• Decree No. 41821, of 11 August 1958, which brought into effect the General Regulations on Safety at Construction Sites
• Decree No. 46427/65, of 10 July 1965, which brought into effect the Regulations on Temporary Premises for Construction Workers
• Ordinance 101/96, of 3 April 1996, which brought into effect the Minimum Safety and Health Requirements Applicable to Construction Sites
• Decree-Law No. 273/2003, of 29 October 2003, which establishes general planning, organization and coordination rules to promote safety, hygiene and health at work on construction sites
• Decree-Law No. 50/2005, of 25 February 2005, that establishes the minimum safety and health requirements for the use of work equipment by workers
• Decree-Law No. 220/2008, of 12 November 2008, as amended, that establishes the legal regime for fire safety in buildings
• Law No. 102/2009, of 10 September 2009, as amended, that establishes the legal regime for the promotion and prevention of safety and health at work

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 Portugal the environmental law framework that governs construction developments reflects European Law principles. The main statutes are:

• Decree-Law No. 142/2008, of 24 July 2008, as amended, that establishes the legal framework for the conservation of nature and biodiversity.
• Decree-Law No. 194/2009, of 20 August 2009, as amended, that establishes the legal regime for municipal public water supply, wastewater sanitation and urban waste management services.
• Decree-Law No. 151-B/2013, of 31 October 2013, as amended, that establishes the legal framework for the environmental impact assessment (EIA) of public and private projects that are likely to have significant effects on the environment.
• Law No. 19/2014, of 14 April 2014, that establishes the bases of the environment policy.

There are also other relevant statutes on

• waste management;
• noise pollution;
• air quality;
• the use of water areas;
• water quality;
• specially protected areas (such as national parks and national reserves);
• ecological and agricultural reserves; and
• energy certification of buildings.

Decree-Law No. 68-A/2015, of 30 April 2015, as amended, implemented the mandatory energy audit requirements contained in the Directive 2012/27/EC on Energy Efficiency. Under this Decree-Law, companies that are not SMEs (small and medium-sized enterprises) are subject to an energy audit of, among other assets, buildings and vehicles, before 5 December 2015 and at least every four years from the date of the previous energy audit.

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?

As part of the process of obtaining a licence, from the local authorities, for construction work to proceed, the developer may be required to fulfil certain conditions relating to the associated infrastructure that is required to support the development. For example, it is common for a developer to accept an obligation to build roads, electrical grids and other support infrastructures, in accordance with the specifications required by the local authority grantor of the construction permit or to transfer, to the municipality, part of its land and to build parking spaces, gardens and to provide areas for accessible housing or controlled costs housing.

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 work procured by the public sector is governed by the Public Contracts Code. In general, the provisions of this code cannot be amended or excluded by the parties. In contracts for the design and construction of works procured by a private sector developer, the parties have greater freedom to agree their own terms and conditions. However, in a scenario where subcontracting is allowed by the Public Contracts Code, such contracts must clearly set out::

• the identification of the parties and their representatives, as well as the title for which they intervene, with an indication of the acts that enable them to do so;
• theidentification of the parties' permits or public works contractor certificates;
• the description of the object of the subcontract;
• the price;
• the form and term of payment of the price; and
• the period for carrying out the services covered by the subcontract.

 If the agreement fails to include this information, its terms will be deemed null and void. These contracts must also be kept on file for a ten-year period following completion of the works.

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?

Contractors and sub-contractors are generally paid as they perform their obligations and carry out the works. To this end, construction milestones are agreed and payments are made if, and when, the milestones are met by the contractor. If the parties agree, a third party entity (typically a quantity surveyor) may be appointed to assess the works, for payment purposes. In public works contracts, payments according to construction milestones are the general rule. Each time part of the construction is completed, the parties calculate the value of the works carried out and a corresponding payment is made to the contractor.

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 time frame within which the construction works have to be carried out and completed has to be specified in the construction contract. A delay in completion of the works may lead to the contractor having to pay contractual fines and possibly indemnities and, ultimately (the worst case scenario), to the contractor being replaced by another contractor or termination of the contract altogether. Completion of the works may, however, be delayed as a resulty of causes attributable to the employer, notably a delay in or lack of payment of the construction price or any instalment. In this case, the contractor may terminate the construction contract, request the overdue payments due to it and retain the building up to the date on which the employer meets its 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?

The Civil Code regulates private works contracts and, in relation to additional or complementary works, it states that the contractor may only perform such works with the consent of all involved parties and if the works are necessary for the completion of the original contract or if they result from unforeseeable circumstances. The contractor must notify the developer of the need for additional works and the parties must agree on the scope and the price of the additional works.

Regarding price adjustments, the Civil Code allows for price revisions if there are changes in the work scope or if the cost of labour and materials increases significantly beyond what was initially estimated. The parties may agree on the terms and conditions of price adjustments at the time of contracting. If no such agreement is reached, the developer must pay the contractor a fair price for the additional work. However, the price of the works cannot be increased in cases where the increase results from defects or omissions attributable to the contractor.

The Public Contracts Code in Portugal regulates the execution of additional or complementary works and states that they may be carried out under certain conditions, such as being necessary for the proper execution of the contract or resulting from unforeseeable circumstances. The contractor must submit a request for authorization to carry out such works, which will be evaluated by the developer.

In terms of price adjustments, the Public Contracts Code allows for variations in the initial contractual price under certain circumstances, such as changes in the scope of the work, unforeseeable circumstances or changes in applicable legislation. The developer may also agree to adjust the price if the contractor presents evidence of increased costs due to factors beyond their control. However, any price adjustments must be based on objective criteria and subject to the approval of the contracting entity.

Given the exceptional situation verified in the supply chains resulting from the global energy crisis, the COVID-19 disease pandemic and the war in Ukraine, and its consequential increases in the prices of raw materials, materials and labour, an extraordinary price review mechanism applicable to public works contracts was enacted which aims to adapt the form of price review that exists in the relevant contract to the actual and effective structure cost of the contract. This review mechanism is enshrined in the Decree-Law No. 36/2022, of 20 May 2022, and envisages accommodating the changes in the prices of materials, labour and equipment support (under the terms already defined in the Decree-Law No. 6/2004, of 6 January 2004).

This exceptional and temporary regime of extraordinary price revision depends on the contractor's initiative and was designed especially for public works contracts whose ordinary price revision is mandatory pursuant to the provisions of the article 382 of the Public Contracts Code. However, this regime applies also, with the necessary adaptations, to public contracts for the acquisition of goods and services.

In everything that is not expressly provided for in Decree-Law No. 36/2022, of 20 May 2022, are applicable the rules contained in the Decree-Law No. 6/2004, of 6 January 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 must be performed in accordance with the applicable architectural and specialities projects and, as between the parties, with the terms of the relevant construction contract.

As far as pre-completion obligations are concerned, it is common for the employer to have the right to audit the construction works (either directly or through a third party) and, upon handover, to subject its acceptance to the removal of any construction defects. For contractual purposes, completion of the works is certified by both parties, directly or indirectly.

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 general limitation period is 20 years. However, claims for defects are time-barred after five years following the date of completion of the construction works. A longer period may be agreed by parties.

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 developer may be liable to the end user of a building for losses caused by and arising from:

• Collapse of the building due to problems with the soil or the construction
• Any repairs carried out or changes to the construction
• Any faults during the construction; or
• Any defects in the building which appear within five years of completion of the works or any repairs

Collapse or defects in the construction must be notified to the developer within one year from the date of the collapse or the defects becoming known to the end user, and any indemnity must be claimed in the subsequent year. This liability cannot be excluded.

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?

Architects and engineers would only be liable to the end user of a building in the event of a tort being committed alongside a breach of the technical and safety rules that have to be complied with as part of the design 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?

Under Portuguese law, the contractor is liable not just for breach of contract but also for unlawfully and wrongfully 'offending the rights of third parties' (such as purchasers, tenants and banks) or 'any legal provision meant to protect the interests of others'.

Breach of the construction contract leads to contractual liability; offending the rights of third parties may give rise to a non-contractual or tortious liability.

The contractor will only be liable if it acted with guilt and the burden of proof lies with the offended party, the claimant.

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 Portugal, public and private works are subject to the jurisdiction of different courts. Civil courts have jurisdiction to determine disputes concerning private works; administrative courts determine disputes concerning public works. As a rule, in both cases, parties have a right of appeal to have the first decision overturned.

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?

Yes. Construction contracts usually include arbitration clauses, particularly if foreign companies are involved. In Portugal, arbitration is considered to be more flexible than litigation through the courts. Arbitration is generally a quicker process than litigation, particularly as the parties are entitled to waive their rights of appeal. It is also a private process; this means that the parties are able to avoid disclosing trade secrets and to keep information confidential. The parties are also entitled to choose their arbitrators; appointed arbitrators are often lawyers with experience of matters such as those in dispute.

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 Portugal, it is possible (but not mandatory) to refer construction disputes to ADR. The use of ADR as a method of dispute resolution is entirely dependent on agreement between the parties. ADR procedures include determination by an expert, mediation and conciliation. In Portugal it is not yet common for dispute to be referred to ADR.

Last modified 22 Mar 2024