REALWorld Law

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

There are no construction organizations which typically produce standard forms of contracts for construction projects. However, International Federation of Consulting Engineers (Fédération Internationale Des Ingénieurs-Conseils) (FIDIC) standard forms can be used for projects in Italy (even if this is not the standard approach), subject to proper adjustments of the relevant text to make it compliant with the Italian legislation and market practice.

Two standard forms of construction contract are recognized.

Design and build (D&B) contract

A D&B contract is a construction project system where a single entity acts as both designer and builder.

Construction contract

This standard form contract is usually used by parties intending to undertake civil construction works. Under this structure, the scope of work of the contractor is limited to the preparation of shop drawings and carrying out the construction works while the design is prepared in advance by professionals directly appointed by the employer.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The main parties involved in a construction project are:

• the client – this can be a developer or an owner;
• the contractor – this is the party that carries out the works. A contractor can engage sub-contractors to meet its obligations; and
• the designer – this is the party that has taken on the obligation to design the works.

To appoint the most suitable construction professional for a specific project, the client generally either:

• carries out a tender process – all the interested contractors submit offers to the client who, after a proper evaluation, chooses the offer thatis considered the best one under both economic and technical perspective; (the client then enters into the construction contract with the selected contractor); or
• directly appoints a construction contractor it trusts and negotiates the terms and conditions of the construction contract.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The contractor bears the risk of the works until the moment of delivery. Generally, upon delivery of the works, a snagging list is drawn up, which the contractor must remedy. After delivery and remedy of the detected snagging, a contractor is, in principle, no longer liable for the works. This does not, however, apply to hidden defects – defects that could not have been known about at the time of delivery. The liability of a contractor in respect of defects is generally subject to an expiry period or limitation period of two years, for hidden defects and non-compliance of the works, and ten years for serious defects and risk of collapse or ruin.

In respect of the other parties involved with a construction project, the contractor is, in principle, only responsible for carrying out the works. The client guarantees the design. There is an interaction between the responsibilities of these two parties; indeed, the contractor has an obligation to detect and notify its client about obvious mistakes in the construction, working methods and/or instructions.

Force majeure clauses are usually contractually agreed between the parties. Invoking force majeure can, in principle, only play a role during the phase prior to delivery of the works.

Force majeure is defined as any events, acts, facts or circumstances which:

• prevent the contractor performing;
• are beyond the contractor’s direct or indirect control;
• cannot be avoided by taking all reasonable precautions necessary to undertake the contractor’s activity; and
• cannot be reasonably foreseen or prevented by a contractor using the proper precautions.

The occurrence of a force majeure event usually involves an extension of the term agreed for completion of the works with no extra-money. The parties may agree that, if the event of force majeure lasts longer than a period previously agreed upon between the parties, the construction contract may be terminated.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Public-private partnerships (PPPs) are a common form of collaboration between the government and the business sector in order to realize a project jointly. They divide the duties and risks and they each retain their own responsibilities. They are commonly used in Italy.

The main forms of PPP include:

• works concession;
• project finance techniques;
• financial leases;
• service concessions; and
• joint-stock companies with public-private mixed capital, for managing local public services

In general, PPP (in its different forms) is expressly regulated by the law on public contracts (Legislative Decree no. 50/2016).

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Yes, the contract price can be agreed in advance by the parties as a fixed lump sum for the performance of the entire scope of work. In such a case, the contractor undertakes the risk for inappropriate assessment of the quantities of the works.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Under standard general conditions it is often agreed that the contractor must adequately insure the works. The contractor must stipulate and maintain, at its care and costs, the following insurance:

• Construction all risks (CAR), where the insured amount is equal to at least the cost for rebuilding the works.
• Damage cover for all its employees and/or possible non-employed staff (responsabilità civile verso prestatori di lavoro) (RCO).
• Civil liability cover to third parties (responsabilità civile verso terzi) (RCT).
• Car civil liability cover (responsabilità civile auto) (RCA) in relation to all the vehicles owned and/or used, which are subject to compulsory insurance, for an amount not lower than that set by the relevant laws.
• Cover for latent defects, which lasts for two years starting from the signing of the testing minutes certifying the positive completion of the works (latent defects insurance policy).
• Cover for the events referred to under section 1669 of the Italian Civil Code, which lasts for 10 years starting from the signing of the testing minutes certifying the positive completion of the works, for at least the value of the cost of rebuilding the works (decennial insurance policy).

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The client does not commonly give security to cover the risks of delayed or absent payment. However, if the client is a special purpose vehicle, the sponsors may be required to provide corporate guarantees or comfort letters in relation to the SPV’s obligations.

Contractors are usually requested to deliver a performance bond (in the form of a first demand bank or insurance guarantee) securing the contractor’s obligations under the building contract and the damages deriving from a breach thereof. The relevant amount is agreed upon by the parties and is usually set in the range of 5–20% of the consideration due to the contractor.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Payments to contractors and sub-contractors are ordinary structured as periodical (usually monthly) instalments corresponding to the actual progress of the works as certified by the director of the works for the account of the employer. A retention (in the range of 5-10% of each instalment) is applied to each instalment as security of the fulfilment of the contractor’s/subcontractor’s obligations and is released upon positive testing of the works.

Advance payment may be agreed by the parties. In such a case, specific collateral may be requested to the contractor/subcontractor to secure the reimbursement of the advance payment in case of early termination of the contract.

In the case of design consultants, payments are usually agreed on a milestone basis (at pre-agreed specific milestones or stages).

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Yes, parties can agree on a fixed term of completion of the works

In cases of delays in the completion of the project by the contractor or in the achievement of intermediate milestones, both legislative and contractual remedies apply.

Legislation

The client can generally be compensated for damage caused by the contractor’s delay (such as damages for not being able to use the project), without prejudice to the client’s right to start legal proceedings to terminate the contract due to contractor’s default in case of material delay. The damages will include client’s loss and the loss of profit, to the extent that they are a direct consequence of the delay.

Contract

Parties commonly agree on the penalties in cases of contractor’s delay. Typically, parties agree that both:

• a certain penalty amount must be paid by the contractor for any day or week of delay compared to the intermediate milestone and/or the term of completion; and
• the penalty is owed to the client (who does not have to prove that it suffered damage).

These agreements do not exclude the right of the client to be compensated for any further damage, unless this right is expressly stated in the agreement. If the amount of the penalty is too high and is contested by the contractor, a court can reduce it. The penalty must be a fair evaluation of the damage.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Contractual mechanisms for dealing with variations to the works vary depending on the variation.

Agreed variations

The contractor cannot vary the agreed technical specifications unless authorized by the client in writing. The client can request the removal of unauthorized variations. Even if the variations have been expressly authorized, if the price of the entire work is determined as a lump sum amount, the contractor cannot receive any consideration for the variations or additions, unless agreed otherwise.

Necessary variations

Variations to the technical specifications can be made and the relevant costs determined by a judge if both:

• the variations are necessary to complete the work according to the best practice and the law; and
• the parties do not reach an agreement.

In practice, these variations are only made due to changes in the law during the construction.

If the cost of the necessary variations exceeds one sixth of the agreed total price, the contractor can withdraw from the contract and receive, depending on the circumstances, a reasonable indemnity. The client can also terminate the contract if the variations are material. However, the parties often agree that the costs of the necessary variations are divided between the parties and that the contractor waives its right to terminate the contract if variation exceeds the above limit.

Variations ordered by the client

Variations ordered by the client cannot:

• exceed one sixth of the contract price; or
• entail material changes to the nature of the works or in the quantity of each portion of the works.

The parties of a private construction contract usually agree to depart from the above limitations.

Even if agreed as a lump sum, the contractor can request compensation for the extra costs arising from variations requested by the client.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

According to the usual market practice, the contractual parties define, in the relevant contract, the concept of ‘completion’ on the basis of their respective interests. Such definition is normally inserted in the contracts since the applicable laws do not provide for a definition of completion of the building works. The certification of completion is normally issued by the consultant appointed by the employer (ie the director of the works), who will be responsible for supervising and verifying the compliance of the works with the relevant project and technical specifications. Moreover, the construction contracts may provide that, in case of disputes between the parties with respect to the assessment of the completion of the works, an independent expert is appointed, either by the parties or by an independent body, in order to proceed with the an independent assessment the outcome of which shall be binding to the parties.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

The construction contracts are subject to the normal statute of limitations regarding contractual breaches, equal to ten years from the date on which the contractual breach takes place and the non- defaulting party is legally entitled to act against the other party. However, the following specific limitations are provided by the law in relation to construction contract.

Hidden defects

With regards to hidden defects of the works and non-compliance of the works with the agreed design the contractor may be summoned by the employer within two years from the date of delivery of the works, provided that the employer has notified the contractor, within 60 days from the discovery of the defect, of their existence. Should the employer be summoned before a court by the contractor for the payment of the contract price, the employer may in any event counterclaim in respect of the defects provided this has been notified as per the previous paragraph and, in any event, within two years from the date of the acceptance of the works. Please note that the employer shall not be entitled to enforce such guarantee should have the employer accepted the works and the defects were known or recognizable by the employer unless the contractor has not disclosed their existence with malice.

Of course, the parties may agree in the contract on improvements and/or extension of the above defect warranty regime (eg including coverage of recognizable defects or specifying that the defect warranty period will start as from the issuance of the positive testing certificate).

Serious defects

With regards to serious defects of the works and risk of collapse and ruin, the employer (and its successors in title) shall notify the existence of the defect within a year from the discovery. Subsequent to the submission the notice, the employer (or its successor in title) shall be entitled to file a claim against the contractor within a year.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

According to Italian law the contractor will be liable vis-à-vis the end users for damages due to its fault as long as the damages are a direct and immediate consequence of the fault. While the liability for hidden defects and non-compliance of the works could be in principle excluded, the regime applicable to the contractor’s liability for serious defects and risk of collapse and ruin cannot be departed.

With regard to the liability of the land developer procuring the works to the end users of the building, it is often the case that the development agreement entered into with the end-user will limit his liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action have been notified to the developer before the expiry of the period.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

According to case law, the designer is jointly liable with the contractor vis-à-vis the end users in the event of serious defects and risk of collapse and ruin of the building works. Under Italian law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is recoverable from non-contractual parties exclusively on the basis of a judicial ruling attesting the existence and the quantification of the damages, the damaging party’s fault or malice as well as the causal relationship (nesso di causalità) between the damaging party’s behaviour and the occurrence of damages. This liability cannot be excluded.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

With respect to the case of serious defects and risk of ruin and collapse, the successors in title of the employer are granted with the same rights granted in favour of the employer vis-à-vis the contractors and, to the extent applicable, the designers and other consultants. With respect to hidden defects, the successors in title of the employer can benefit of the rights granted in favour of the employer vis-à-vis the contractors, designers or other consultants provided that the relevant contract and/or warranties are assigned to the successor in title. It is worth noting that in such a case the successor in title will be entitled either to act against the employer, in its capacity as vendor of the completed building works under the sale and purchase contract, or against the contractor as successor to the employer.

With regards to the tenants, the law does not grant them with rights vis-à-vis either the contractor or the consultants. In such a case, the tenant will therefore have the right to file a claim against the landlord, should the latter be either the employer or the successor in title, on the basis of the lease contract’s provisions. The landlord will then be entitled to file a specific claim against the contractors and/or the consultants on the basis of the relevant contracts.

Finally, with respect to the lending banks, the law does not provide specific remedies. In consideration of the above the parties may agree a mechanism whereby the lender will have the right to step into the contractual relationship existing between the employer and the contractor, in case of certain events which may have an impact on the construction contract (such as, but not limited to, subcontracting, withdrawal, early termination and/or termination due to one party’s default) in order to preserve the lender’s interests and rights.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

There are no specific construction courts or tribunals operating in the private sector. Construction disputes are dealt with by ordinary courts (Tribunali). Decisions of the courts can be appealed before courts of appeal. Decisions of the courts of appeal can be appealed before the Supreme Court.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

Depending on the value of the building works, the construction contracts usually provide for an arbitration clause that may refer to either technical or legal disputes arising from the building works. With respect to litigation through the national courts, the arbitration procedure allows the parties to obtain a ruling in less time than litigation through the national courts. Please note however that the arbitration procedure involves the payment of higher legal expenses and fees to the arbitration panel.

Last modified 2 Aug 2023

What official permissions, licences or consents are required by a building or engineering contractor before it can start work?

There are several ADR methods:

• amicable settlements;
• judicial or extra-judicial conciliation;
• arbitration; and
• mediation, by which the parties use a neutral, independent and impartial person, who guides the parties to their own mutually satisfactory agreement.

There are also non-adversarial forms of conciliation provided for by special laws for specific sectors, such as employment, agriculture and telecommunications. There are no specific non-adversarial forms to be used for construction disputes.

Last modified 2 Aug 2023