Legal construction warranties and stakeholder liabilities in the construction sector: A new business opportunity for insurance companies
The Construction Law introduces various legal construction warranties which all contractors and sub-contractors participating in construction projects must now undertake while also imposing new liabilities upon stakeholders in construction projects in Cambodia. As a result, insurance companies now have the opportunity to play a sizeable role in this sector by covering these risks.
According to recent data released by the Ministry of Land Management, Urban Planning and Construction, total investment in Cambodia’s construction sector exceeded US$3 billion between January and June 2019 as compared to only US$2.1 billion during the first half of 2018, representing an increase of 57.5%.
The implementation of a comprehensive law governing the construction sector was thus a high priority for the Royal Government of Cambodia for the purpose of ensuring investor confidence and improving the overall level of quality, health and safety in this sector.
To this effect, the Law on Construction was promulgated by a Royal Kram No. NS/RKM/1119/019 on 2 November 2019 and entered into force on 3 November 2019 (“Construction Law”).
This new law encapsulates various new provisions set to have a significant impact in the construction sector such as those relating to: (i) defect liability periods and (ii) construction project stakeholder liability.
Prior to the implementation of the Construction Law, contractors were generally averse to granting a construction warranty to their clients. The agreed-upon terms, conditions and duration of defect liability periods were typically subject to tough and time-consuming negotiations between the parties and in practice were generally only granted for one or two years.
The Construction Law now requires all contractors and sub-contractors engaging in construction projects in Cambodia to provide their clients with mandatory defect liability guarantee periods for specific durations even where not expressly mentioned in the construction contract itself.
Article 71 of the Construction Law prescribes three different durations for the respective defect liability period depending on the type of construction work being carried out:
- Two years for work related to electricity, water, mechanical and other relevant work;
- Five years for work related to exterior walls, windows, doors and rooftops; and
- Ten years for the structural construction made of reinforced concrete, concrete metal or metal.
When a defect appears, it will now be required that the defect and the nature of the work be identified in order to verify whether the defect is covered by the relevant defect liability period.
It is possible through mutual agreement for the parties to extend the duration of these warranties but not to reduce them, as such warranties and their minimum duration are now compulsory components of construction contracts.
Article 71 of the Construction Law expressly provides that the “parties to a construction contract may agree to other defects liability period which is longer than the period mentioned in Article 71” but “the determination of a defect liability period which is shorter shall be null and void”.
The purpose of Article 71 is to safeguard investors or purchasers in the event that a defect is discovered following the commencement date of these warranties (i.e. the handover date) and throughout the life of the warranty period. In this scenario, the party responsible for such a defect will be liable to remedy it.
The effective starting date of these warranties will be the handover date. Therefore, if a defect materialises before the handover date, the contractor will not be obliged to repair it according to Article 71 of the Construction Law.
However, it must still repair it pursuant to Article 654 of the Civil Code according to which “the contractor assumes an obligation vis-à-vis the principal to complete the work without defect”.
In addition to these defect liability periods, the Construction Law includes provisions concerning the liabilities of all stakeholders in the construction sectors.
The Construction Law notably refers to (i) liability of the project designer due to damages caused by a defective design document, (ii) liability of the certifier in the event of damage caused due to a defective, inaccurate or incomplete inspection, (iii) liability of the producers of construction materials, products and equipment if they are deemed to be defective, and (iv) joint-liability of the owner and the contractor in the case of damage due to defective construction or inadequate site management.
The liability of the project designer, certifier, owner or contractor is limited to three years from the date that the aggrieved party or its representative may first claim compensation or ten years after the damage initially occurred.
The liability of the producer is also limited to three years from the date that the victim or its representative may first claim compensation or ten years after the damage first occurred. However, if the materials, products and equipment include substances deemed hazardous to health, this period may be extended by another 20 years.
The introduction of these compulsory defect liability periods and new stakeholder liabilities corresponds with the burgeoning activity recently seen across the construction sector. This can also be expected to increase construction costs given the need to cover these new risks for contractors and sub-contractors.
The logical next step will be the creation of relevant policies by insurance companies to cover such risks. These policies will need to factor in potential damages should the contractor, sub-contractor, project designer, producers or developers fail to remedy construction defects upon their discovery (post-handover) or fail to indemnify the investor or purchaser.
Insurance companies will need to be inventive when formulating competitive policies to cover these risks. The Construction Law affords them a lucrative opportunity to develop their activities, tailor their policies, increase their turn-over and simultaneously heighten investors’ confidence when they enter the market. In this respect, regional and international examples abound that Cambodian insurance companies can draw from in terms of facilitating appropriate coverage for these risks.
In conclusion, the Construction Law aims to strongly secure and safeguard investors and purchasers of construction projects by stipulating these defect liability periods and imposing liabilities upon construction sector stakeholders. Now it is the turn of insurance companies to play the main role in this industry and adapt their products to the new legislation accordingly.
About the Author:
Charles AMAR has extensive experience in all aspects of real estate law with a particular focus on issues related to real estate investment, project development, construction, and asset management.
He regularly advises domestic and foreign clients seeking expert advice and innovative solutions on significant and complex transactions involving property, both developed or at the planning stage.
His competence and expertise run the full gamut of real-estate projects whether they be residential (boreys, condominiums), office space, shopping centres, hotels, warehouses, industrial facilities, or car parking lots.
Charles AMAR is a consultant working with Sarin & Associates in collaboration with DFDL.
For further information, please contact him at the following address:
No 30, Preah Norodom Boulevard, 4th-floor Bred Bank Building, Sangkat Phsar Thmey 3, Khan Daun Penh (PO Box 7), Phnom Penh, Kingdom of Cambodia,
T: +855 23 210 400 | M: +855 68 68 66 02 | E: charles.amar@dfdl.com
This publication is for your information only. It is not intended to be comprehensive and it does not constitute and must be not relied on as legal advice. You must seek specific advice tailored to your circumstances.
The information contained in this article is provided for information purposes only and is not intended to constitute any legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations. Unless otherwise indicated, Charles Amar owns the copyright of this article. If you seek to reproduce or otherwise use this article or any part of it in any way, it is your responsibility to obtain approval for such use where necessary.
Informal translated to Khmer by Construction & Property Magazine
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