The Plenum of the Supreme Court of the Republic of Azerbaijan has adopted a new resolution to ensure the uniformity of judicial practice regarding disputes arising from construction contracts.
Information about this was provided to “Elchi” by the Supreme Court.
It was stated that the resolution provides a detailed explanation of the legal nature of construction contracts, the formal requirements for such contracts in relation to commercial entities, the civil-legal consequences of failing to comply with the requirements of the Law “On Public Procurement,” and the rights and obligations of the contracting parties. These legal positions serve to make contractual relations more secure and legally certain for entrepreneurs, government agencies, and citizens alike.
What is a construction contract?
A construction contract is an agreement under which the contractor undertakes to perform the work specified in the contract, and the client undertakes to pay the agreed fee in return. The subject of a construction contract consists of the performance of specific work by the contractor and the handover of the result of that work to the client.
The difference between a construction contract and a service contract
The Plenum resolution indicates that construction and service contracts are independent types of contracts that give rise to different legal consequences. In practice, confusing these relationships can lead to an incorrect determination of the parties’ rights, duties, responsibilities, and the applicable legal norms. Therefore, the legal nature of a contract should be determined not only by its title but also by taking into account its actual content, the nature of the parties’ obligations, and the essence of the result to be achieved.
The main goal of a construction contract is to achieve a concrete result that is visible or tangible (including that provided in electronic form). For example, real estate is built or repaired, a road is paved, equipment is installed, a computer program is developed, etc. The contractor’s responsibility is related to the quality of that result.
Providing services, on the other hand, is an activity that provides benefit or assistance to the client without creating a tangible result. Its purpose is the activity itself. For example, security or cleaning services, legal or accounting services, educational services, etc. A service provider does not guarantee the achievement of a specific result. Unlike construction relations, their responsibility is not related to the quality of a result, but to the proper and conscientious performance of the activity itself.
In what form should a construction contract be concluded?
Although the Civil Code does not establish a specific form requirement for construction contracts, the legislative foundations of commercial activity (Tax Code, Urban Planning and Construction Code, Law “On Non-Cash Settlements,” etc.) make it necessary for such contracts between commercial entities to be concluded in writing.
The systematic, complex, profit-oriented, risk-bearing, and responsible nature of commercial relations requires a higher standard of proof for these relationships. A written contract ensures the precise, unambiguous, and clear expression of the parties’ will, protects legal certainty, and limits the possibility of abuse of rights. In this respect, construction contracts between commercial entities must be concluded in writing.
Civil-legal consequences of non-compliance with the requirements of the Law “On Public Procurement”
The Plenum Resolution specifically emphasizes that the conclusion of oral contracts for construction works where the legislation on public procurement applies is not permitted.
A contract concluded in oral form or in writing without following the rules established in the Law “On Public Procurement” is invalid. As a rule, the application of the consequences of the invalidity of a transaction (i.e., that each party must return everything received under the transaction to the other party) and the emergence of other legal relations arising from the law (e.g., unjust enrichment) are excluded for claims arising from contracts concluded in such a form.
This is because one of the tasks of civil legislation is the protection of the rights and legitimate interests of civil law subjects. The purpose of the rules regarding the consequences of the invalidity of a transaction and unjust enrichment in the Civil Code is precisely the protection of legal rights and interests. Persons who knowingly enter into legal relations in violation of legislative requirements do not acquire rights and interests arising from the law. Furthermore, applying the consequences of the invalidity of a transaction or the rules on unjust enrichment creates conditions for the violation of the Law “On Public Procurement.” This is because, in such a case, the payment of funds under those contracts is effectively ensured, while only their legal basis is changed.
When reviewing such cases, if signs of a crime are discovered in the actions of officials of the relevant state body, a special ruling must also be adopted in accordance with Article 265.4 of the Civil Procedure Code.
In addition, the Plenum also provides for exceptional cases. When reviewing such cases, it should be taken into account in which field the contractors operate and for how long, whether they have previously had contractual relations with state bodies, and whether they were aware of the requirements of the Law “On Public Procurement.” If, as a result of such an assessment, it is determined that these persons did not know that the contracts were illegal, had no opportunity to know this, and acted in good faith in this regard, the value of the expenses incurred for those works should be determined based on average market prices and recovered from state bodies in accordance with the rules of unjust enrichment.
Recommendation
The most reliable way to prevent legal risks in construction relations is to draft the contract in accordance with the requirements of the legislation. Using professional legal assistance when concluding a contract can not only reduce commercial risks but also prevent long-term court disputes and additional costs later on.