The mutual need for security between construction companies and real estate developers

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At the beginning of a construction project, there is almost always an uneasy feeling among new partners. The construction company worries if the developer can and will pay. The developer worries whether the construction company will really finish ist work. Both worries are understandable, since a lot of money is always at stake.

To reduce the diffuse anxiety of the parties, various assurance schemes have been developed over time.

Among the most important are:

Performance guarantee according to ÖNORM B 2110 Pkt. 8.7.1:

"If a deposit has been agreed, it must be paid within 14 days of the conclusion of the contract, unless otherwise agreed. During the contractual performance period, one contractual partner may demand security from the other contractual partner for the services to be rendered up to the amount of 20% of the contract sum (the price under civil law). This security shall be handed over within 14 days after request and may only be claimed if insolvency proceedings have been instituted against the assets of the contracting party providing the security or if a final judgment on the secured performance has been rendered in favor of the contracting party requesting the security. The costs of the provision of the security shall be borne by the beneficiary Contractual Partner concurrently with the receipt of the security, however, in the amount of no more than 1% p.a. of the amount of the security. Unless otherwise agreed with respect to the repayment of the security deposit, it shall be returned in accordance with the reduction of the obligations of the contracting party to be secured by the security deposit, but no later than 30 days after the performance thereof."

Guarantee under 1170b ABGB:

"(1) The contractor of a building, of an outdoor installation to a building or of a part thereof may demand a guarantee from the customer for the outstanding remuneration from the conclusion of the contract up to the amount of one fifth of the agreed remuneration, but in the case of contracts to be performed within three months up to the amount of two fifths of the agreed remuneration. This right cannot be waived. Cash, cash deposits, savings books, bank guarantees or insurance policies may serve as security. The costs of the collateralization shall be borne by the collateral taker insofar as they do not exceed two per cent of the collateral amount per year. The obligation to bear the costs shall cease if the security has to be maintained only because of objections raised by the Purchaser against the claim for payment and the objections prove to be unfounded.

(2) Security pursuant to para. 1 shall be provided within a reasonable period to be determined by the Contractor. If the Employer fails to comply with the Contractor's request for the provision of security, or fails to do so sufficiently or in good time, the Contractor may refuse performance and declare the contract avoided by granting a reasonable period of grace (section 1168 para. 2).§ 1168 Abs. 2).

(3) Paras. 1 and 2 shall not apply if the party ordering the work is a legal entity under public law or a consumer within the meaning of section 1(1)(2) and (3) of the Consumer Protection Act." § 1 Abs. 1 Z 2 und Abs. 3 KSchG ist.“

In contrast to the performance guarantee regulated in the ÖNORM, the ABGB regulation cannot be waived and offers the construction company numerous possibilities for use. Thus, the construction company can theoretically stop performance immediately after signing the contract and draw the guarantee. The developer would have to transfer and in the worst case dispute for years. Alternatively, the construction company can finish building, submit the final invoice and, in the event of a reduction, which may also be justified, pull the guarantee in return. Again, the developer would have to pay the full amount and then litigate.

Conversely, the developer could wrongfully reduce an invoice or not pay it at all and, in the event of a morally perfectly understandable cessation of performance on the part of the construction company, draw the performance bond.

The possibility of misuse is inherent in any abstract guarantee, since no substantive review takes place before payment. It is interesting to ask whether the legislator really had an abstract guarantee in mind when formulating 1170b ABGB (no other guarantee is currently accepted in practice). In my professional practice, I have already encountered lawyers who see room for interpretation in this regard, and it will be interesting to see whether this will be decided sooner or later.

In sum, one often gets the feeling that the concerns have become greater rather than smaller as a result of the freezing options.

So what can the parties do to reduce their worries?

With regard to the concerns resulting from the above-mentioned guarantee options, there is the possibility of agreeing on a truce according to the motto "You don't demand a guarantee from me, I don't demand one from you". A legally clean implementation of such a "gentlemen's agreement" is more difficult, since a contractual link is not legally effective.

With regard to the fundamental problem that construction is expensive and that a construction site has to be pre-financed by someone, the proposal of short invoicing and payment cycles (e.g., weekly/14-day collateralization and invoicing with a 7/14-day payment period) seems pragmatic.