Nitrogen barriers: who will pay for it?

Nitrogen holds many construction projects in check. In many cases, project design had taken into account limited allowable nitrogen deposition. Suddenly that limited nitrogen deposition turned out to be no longer allowed (see this blog). Slowly some more clarity is coming for the first projects, for example because 'internal balancing' can be done or the deposition can be reduced to zero with measures in the construction method (see this blog). How long it will take for each individual project is uncertain. What is certain, however, is that many projects are in the starting blocks, but are delayed. Contractors have already incurred costs (calculations, preparations) that are not yet offset by revenues, staff capacity has been reserved, and subcontractors and suppliers may already have been contracted. In short, downtime damage occurs.

In this blog, I address the question of whether standstill damage is the responsibility of the executing party (hereinafter referred to as the contractor) or the contracting party (hereinafter referred to as the principal). In doing so, I also discuss the possibilities and impossibilities arising from the UAV 2012 and UAV-GC 2005, law and contract.

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Nitrogen step 1: Is there a contracting agreement?

If there is no agreement yet, for example because negotiations are still in full swing (no agreement on price and Scope) or the tender procedure has not yet been completed, the contractor is in principle not entitled to performance and therefore not entitled to delay damages.

If there is an agreement, then "step 2" comes into play.

Step 2: Are there any suspensive (or resolutory) conditions?

Many construction contracts include suspensive conditions (or dissolving conditions), such as obtaining an environmental permit, obtaining financing and/or more commercial conditions, such as - for example - selling 70% of the homes. Contractors make pre-investments and reserve capacity on the assumption that these suspensive conditions will be fulfilled at a realistically estimated 'X-moment'.

• If no conditions precedent are included in the contract or have already been fulfilled, the contractor is in principle entitled to perform the work (see "Step 3").
• If the conditions precedent have not yet been met then it is necessary to examine whether nitrogen obstacles fall within the scope of a condition precedent:
  • if nitrogen impediments are covered by a condition precedent, the contractor is stuck. Many contracts provide either an option to terminate the contract if the condition precedent is not met by X time or an indexation arrangement. A price indexation arrangement often offers only limited compensation, and termination of a contract is not a desirable solution for the contractor, as it usually does not recoup costs incurred and possibly obligations assumed. The inclusion of a - sufficiently covering - condition precedent is therefore wise for clients;
  • Whether an obstacle in the context of nitrogen falls within the scope of conditions precedent must be carefully considered in the wording. A principal may not "abuse" other conditions precedent in order to stall for time until nitrogen does become clear.

Nitrogen step 3: responsibility permits

The next question is where the responsibility lies regarding obtaining permits, especially the Nature Permit (for nitrogen deposition).

Private Residential Construction

In (large-scale) private housing construction, in most cases the private client has no responsibility with regard to permits, but this responsibility lies with the contractor (if he is also the developer) or the developer. The contractor can only limit his risks towards the client by using suspensive conditions himself, so that he cannot be forced to build (or compensate for damages) if construction is not allowed to start because of nitrogen deposition. Recovering one's own damages is not possible if contracting and development are in one hand. If they are separated, it depends on the agreements made between contractor and developer.

UAV 2012

Paragraph 5 (1) UAV states that "the principal shall ensure that the contractor has timely access to the public and private law permissions required for the design of the work according to the specifications." No construction is allowed without permission or permit. The client is therefore responsible, unless expressly agreed otherwise. Section 6 paragraph 13 UAV contains a similar clause in case construction has already started and regulations change afterwards.

Because the principal will/can not give the contractor the opportunity to start (or continue) work until it is clear that there is no impediment in the context of nitrogen, the principal defaults toward the contractor. The principal is then in principle liable for standstill damage. The contractor can then also - under the circumstances described in paragraph 14 - terminate the work in an incomplete state using the (contractor-friendly) settlement method described in paragraph 10.

UAV-GC 2005

Section 10 paragraph 1 UAV-GC deals with permits. Under paragraph 1, the contractor has a best-efforts obligation to obtain permits. If there are changes in regulations (as is the case here with nitrogen), the principal bears the responsibility for this under Section 11 (3), unless the contractor could already have foreseen the consequences of those changed regulations on the day he submitted his price offer. The contractor is entitled to cost reimbursement and/or extension of time under paragraph 44 and may - under circumstances - terminate the work in an incomplete state under paragraph 16 paragraph 7, according to the settlement method stipulated in paragraph 16 paragraph 10.

Deviations in the contract

In many contracts deviations from standard conditions such as the UAV and UAV-GC are agreed upon. It is therefore advisable to test these for deviations from the UAV (usually in general provisions of the specifications) and UAV-GC (usually in the annexes to the Model Basic Agreement).

Step 4: notification and substantiation of damage

The contractor is obliged to report delay damage caused by nitrogen to the principal as soon as possible, see the UAV in Section 6 (15) and UAV-GC in Section 44 (2). The rationale behind this obligation to report is that this gives the principal the opportunity to collect all relevant information in time and also to take measures to limit damage as much as possible. Late notification can mean that (part of) the damage is not compensated.

It is up to the contractor to sufficiently substantiate his damages. The contractor also has a damage limitation obligation here, for example by deploying available personnel elsewhere as much as possible.

A sensible option is to investigate whether measures such as the use of electric cranes can be used to meet the new nitrogen rules. Such measures may involve additional costs. I believe that if all the steps for this can be successfully completed by the contractor, the additional costs associated with taking these measures will be borne by the client. Note: That there are restrictions under nitrogen has been known for some time now; both the UAV (section 6 paragraph 13) and the UAV-GC (section 10 paragraph 4) require the contractor to take into account the newly disclosed regulations in new price quotations (and prior design work).

Conclusion

Answering the question of who is responsible for standstill damage requires a proper assessment of the content and scope of the construction agreement and conditions precedent in particular. Then it is important who is responsible for obtaining the consent/permit under nitrogen and whether damages are reported in a timely manner and can be substantiated.

Finally

The consequences of the nitrogen issue are borne in the contractual chain, when in fact no major blame can be placed on either party. This raises two additional questions:

• Whether the principal can successfully invoke force majeure. Although the principal cannot in fact be blamed, the UAV (6 paragraph 13) and UAV-GC (11 paragraph 3), for example, explicitly provide for the phenomenon of regulations changing or coming into force after the contractor has issued his price and place that risk with the principal. I do not see why this should be different for nitrogen regulations.
• Whether there is unlawful legislation, which under circumstances makes it possible to recover damages from the government. After all, the parties all assumed the correctness of regulations issued by the government. The damage occurred because the parties made investments in a project on the assumption that regulations made it possible to realize the project. Realization of the project now turns out not to be possible, or at least only at additional cost, or at least only at a later time. So I certainly do not consider a claim for damages against the government to be without chance.