Risky Construction, Real Estate Land In Idaho
Public officials say the Urals region is breaking records in Russia for construction rates. About 3 million sqm of housing alone were commissioned in 2007, to say nothing about large industrial and commercial properties. Along with positive indicators, the construction industry abounds in legal offenses and, as legal practice shows, contractors are the most disfranchised in such incidents.
Frankly Speaking
Obviously, construction organization implies interaction between numerous stakeholders. Above all, there are investor and client (often the same entity), prime contractor and numerous subcontractors. “This is a standard and expedient system of business cooperation, where each subject performs a certain function. Thus, the investor puts his funds into a property, the prime contractor acts as coordinator of construction and assembly works and several dozen subcontractors are executors. One of the subcontractors is good at digging the dirt, another one is involved in electricity, the third one specializes in installation of alarm systems and so on. Each of them is a professional in his own realm and each is a link in the chain,” says director of the legal disputes department at the Yekaterinburg-based legal security firm Intellect-G, Roman Rechkin. And this scheme is specified by law in detail.
Pursuant to Article 706 of the Civil Code, unless the contract stipulates the contractor’s obligation to perform all construction and assembly jobs personally, he may involve other persons (outsourcers) in the fulfillment of his duties. In this case, the contractor acts as prime contractor with respect to the customer, whereas the outsourcers act as subcontractors. According to legislation, the prime contractor in this case is a connecting link between the construction customer and subcontractor. Therefore, double responsibility is laid on the prime contractor. First of all, he bears responsibility to a subcontractor for any default of the construction customer on his commitments. Second, the prime contractor is also answerable to the customer for losses incurred by a subcontractor hired contrary to the terms of the contract with the customer and for the consequences of a subcontractor’s undue fulfillment of his obligations even when the latter was involved in coordination with the customer.
At first glance, this system of interaction seems logical, grounded and quite expedient from the lawyer’s perspective. “However, this scheme works well only when each of the parties conscientiously performs its functions,” explains Roman Rechkin. Participants in the Urals construction market admit that quite often one of the parties may seriously infringe upon the interests of another party, resulting in gross financial losses and even bankruptcy.
In Focus
A row over the Focus Mall in Chelyabinsk continues to spawn new conflicts. As Commercial Real Estate Ural reported earlier, legal proceedings began last October between the owner of the local Focus Mall, Russky Dom holding, and the owner of the Kino&Domino entertainment complex, IPK Iprocom, one of the mall’s tenants.
No sooner had the conflict between Russky Dom and Iprocom been finalized, than the latter corporation got involved in another brawl and legal proceedings. This time Chelyabinsk-based RosSnab, affiliated with the Arkaim Group, brought an action against the company. IPK Iprocom had acted as investor and customer for construction work in the Kino&Domino entertainment complex. Ruspromstroy, acting as prime contractor, handled the project. One of the subcontractors involved in the fulfillment of construction and assembly works was RosSnab. “This project was strategically important for Chelyabinsk Region and interesting to our company,” underscored Leonid Bespaly, principal of the construction company RosSnab. It is noteworthy that the Kino&Domino multiplex in Chelyabinsk was promoted as the largest entertainment complex in Eastern Europe. Moreover, the Chelyabinsk complex was a pilot project for a national program to create such multiplexes in eight Russian cities.
“We set to work on an area of 4000 sqm in April 2006. Until November, we had obtained financing from the prime contractor; however, in December, the money did not arrive. As a result, we performed work to the tune of 33 million rubles, of which 21 million we obtained from Ruspromstroy. The prime contractor’s debt to our company amounted to 12 million rubles,” recounted Leonid Bespaly. He says all the work was accepted and approved by the prime contractor, which is confirmed by respective documents. However, RosSnab has not yet received the balance, in spite of an arbitration court verdict, which has already taken effect. The reason is a clause in the Civil Code saying the investor and customer bear no responsibility to subcontractors, says Mr. Bespaly.
As Elena Shubina, legal adviser at the Arkaim management company, explained, pursuant to the Civil Code and the terms of the contractor’s agreement signed with Ruspromstroy, they could claim payment for work done only from the prime contractor engaged in property construction, and not from the customer and investor, which is the only financial source and beneficiary of all the results.
In fact, RosSnab is making claims against the prime contractor, whose chartered capital is only 10,000 rubles; in addition, this company has no assets to be requisitioned in pursuance of the claim. At the same time, according to par. 3 of Article 706 of the Civil Code, the subcontractor has no right to make any claims against the investor – in this case, the Moscow-based Iprocom, as the latter is not answerable to third persons for any misdeeds of its prime contractor. “We won the case but will hardly be able to recover our money,” Ms. Shubina complains.
As noted by lawyers and participants in the construction market, the situation with Iprocom does not set any precedents on the Urals market. “But interaction between the participants in the construction process is conditioned on numerous arrangements and delicacies that the parties try not to bring to light,” says vice president of the Urals construction corporation Mayak, German Korotkovsky. In his words, one of the parties to such rows is oftentimes a government structure, which defaults on the timely payment of the work ordered. Such conflicts are normally settled behind closed doors.
“However, I know from my own experience that even such conflicts can be resolved,” says Mr. Korotkovsky. “In such cases, the subcontractor may requisition the real estate it has built.” Mr. Rechkin confirmed that this might be a legal way of debt repayment. “The subcontractor may hold the property where all the work has been completed, then sell it by auction and recompense its outlay. But this is a complicated scheme, which few of the construction organizations use in practice. On the one hand, holding another’s property is a serious conflict, and on the other hand, there is much bureaucracy and dealings with government agencies related to property appraisal, organization of auction sales and so on,” said Mr. Rechkin. Vice president of Russky Dom Aleksei Piskunov sees a different way of solving the customer-prime contractor-subcontractor dilemma. “As to the Chelyabinsk conflict, the subcontractor must prove in court that Iprocom, rather than Ruspromstroy, is the beneficiary of the Kino&Domino entertainment center. Only in this case will it be able to exact the debts.” However, lawyers generally agree that it is better to avoid such situations: the subcontractor should be more careful as it studies the financial state of the prime contractor and conscientiousness of its potential partners. Subcontractors should pay attention to the prime contractor’s solvency: its chartered capital and the property at its disposal. “These parameters are a sort of guarantee for the subcontractor that, in case of its partner’s bankruptcy, it will be duly recompensed, emphasized Mr. Rechkin.