In the situation where the principal rightly claims restoration from the contractor as a result of defective work performed by its subcontractor, the contractor must first give the subcontractor the opportunity to perform the restoration. If the subcontractor refuses to perform the repair or fails to do so, the contractor has the right to convert this claim for performance/repair into a claim for substitute damages. The contractor does this with a so-called "declaration of conversion. The effect of the conversion statement is that the contractor may have a third party perform the repair work and recover the costs from the subcontractor.
In practice, this means, for example, that if the plasterer has not performed his work as required, the plasterer must first be given the opportunity to repair his own stucco. If the plasterer refuses to perform remedial work within a reasonable time, then the claim for restoration can be converted to a claim for substitute damages. After conversion, the client may hire another plasterer to have the repair work done at the first plasterer's expense.
Offer and start date
During the discussion between the contractor and his subcontractor, the contractor will often feel pressure from his client to speed up. In spite of this pressure, the contractor should proceed thoughtfully and not issue the conversion statement too quickly. Before issuing the conversion statement, the contractor must have a quotation from a third party and the contractor must have an idea of the possible date on which the third party can start the repair work. If the third party can only carry out repairs in the longer term, the contractor must either wait before issuing the statement of conversion or have another third party carry out the repairs.
This has everything to do with the fact that the date of issuance of the declaration of conversion can be used as the reference date for determining the amount of replacement damages. Should price increases occur between the time of the declaration of conversion and the actual performance of repairs, the price increases may be borne by the contractor.
Case law: what does it show?
From the case law of recent years, there is no unambiguous line of when to estimate the amount of substitute damages. This applies in particular to lower case law (courts). In lower case law, the date of (i) the occurrence of default, (ii) the declaration of conversion or (iii) the reinstatement offer is variably used as the reference date for estimating the amount of damages.
It is possible that this line has become more unambiguous as a result of two recent rulings (Gerechtshof 's-Hertogenbosch dated September 19, 2023 and RvA dated February 1, 2024). In both rulings, there was an extended period of time between the declaration of conversion and the remedial work, resulting in price increases. In both cases, the price increases are borne by the party that made the conversion statement.
Gerechtshof 's-Hertogenbosch dated September 19, 2023, ECLI:NL:GHSHE:2023:2984
The case before the 's-Hertogenbosch Court of Appeal involved the contractor's well-known splits, with the contractor on the one hand wanting to keep his client happy and on the other hand trying to get his subcontractor to perform repair work. In the end, the contractor converted the claim for performance/repair into substitute damages. At the time of the conversion statement (Dec. 4, 2020), the contractor had an expert report that showed that the repair costs would total €14,850. The issue culminated in litigation, after which the contractor requested several repair quotes during the litigation process. These quotes (requested in April and May 2022) showed that the repair work amounted to €33,030 instead of €14,850.
Logically, the contractor wanted to receive replacement damages in the amount of the (more expensive) bids. However, both at first instance and on appeal, the contractor received the lid on the nose with regard to the long wait to perform repairs after the declaration of conversion. The contractor was awarded an amount of €14,850. The remainder was for his own account.
COA dated February 1, 2024, No. 72,318
Also in the above appealed case before the Council of Arbitration in Construction Disputes, the date of the declaration of conversion was taken as the reference date for estimating the replacement damages. That matter involved the construction of a residential house. After completion, clients complained about defects in the residential house.
After the contractor failed to repair, the principals converted their claim for performance/repair into a claim for substitute damages by filing a statement of claim on July 7, 2022. At first instance, the COA ruled that the repair costs amounted to €17,500 by judgment on April 18, 2023.
After the verdict, principals request four repair quotes. All four bids are considerably higher than the estimated costs by the COA, after which the principals appeal against only the estimated repair costs. There, the discussion centers on the answer to the question of what the cut-off date is for the budgeting of replacement damages. The contractor believes that the reference date is the time of non-performance (May 1, 2021) and the principals believe that it should be the date of the repair quote(s). In contrast, the COA held that the date of the conversion statement is the reference date (July 7, 2022) and that any price increase between the conversion statement and the actual repair is the clients' responsibility. The argument that the principals did not have clarity about the damages until after the first instance judgment for the first time does not stand up.
Tips for practice
Previous rulings emphasize the importance of proceeding expeditiously after converting a claim for performance/restoration into a claim for substitute damages. Any delays between the declaration of conversion and actual restoration - resulting in price increases - may be borne by the converting party.
It is therefore very important to act thoughtfully in construction disputes and not always let the passage of time be decisive. It is necessary to think ahead to make the right financial considerations. For example, the contractor or client would also do well to make sure that a start date for the repair work is already in sight and that the validity period of the (prices in the) repair offer does not expire during the period that the first subcontractor still has the opportunity to carry out the repair.
