Overview: Construction disputes before the newly formed Court of Economic Affairs in Latvia

On 31 March 2021, the newly formed Court of Economic Affairs (CEA) of the Republic of Latvia.  The CEA now has sole jurisdiction over complex disputes of commercial nature, including a certain category construction disputes. The law states the CEA reviews “claims arising from contractual obligations between participants of the construction process, including subcontractors, for the construction of second and third group buildings, which are subject to a building permit, except construction of individual one- or two-apartment buildings and functionally related buildings”(Clause 9 Article 24 (1.1) of the Civil Procedure Law).

The wording of the aforementioned provision could cause confusion and questions could arise as to which construction related claims should indeed be brought before the CEA, and which construction related claims are to be brought before the district (city) court. A comprehensive practice is not yet available and only time will show how the laws regulating the CEA’s jurisdiction will be applied. Currently, some answers can be found in publicly available legislation documents and in the laws regulating the overall construction process and relevant definitions. The author has prepared a brief summary of the main findings on how to distinguish jurisdiction of the CEA from the jurisdiction of district (city) courts in Latvia with regard to construction disputes. In order to bring a claim before the CEA, the construction dispute must meet all the following three preconditions.

Precondition No 1 – the dispute has arisen between construction participants

The law stipulates the CEA has jurisdiction over disputes between construction participants, including subcontractors. As defined in Article 19 of the Construction Law, the construction participants are the owner of the land, owner of the building, designer, constructor, construction supervisor and expert.

The CEA, however, will not revise disputes concerning the construction participants’ liability towards third parties. For example, a neighbor, who owns a real estate adjacent to the construction site, will not be entitled to bring a claim before the CEA against a construction participant and claim losses for the damaged property; a seller of construction materials will not be entitled to file a claim before the CEA regarding a constructor’s debt for goods delivered to the construction site.  The CEA will also not have jurisdiction over disputes arising from the employment relationship between a construction participant and its employee(s).

Precondition No 2 - the claim arises from contractual obligations

The wording of the law "claims arising from contractual obligations", might give the impression the CEA will only revise claims related to the non-performance of obligations expressly specified in the contract (e.g., failure to make contractual payments, to fulfill other contractual obligations, etc.). However, the Ministry of Justice, which proposed such wording, expressed the opinion this precondition is not to be applied narrowly. It is possible to bring a claim before the CEA both for a breach of obligations directly mentioned in the contract and for a breach of the requirements stipulated in construction laws, which may not be expressly included in the contract, but are applicable to the overall performance of the contract.

The author emphasizes the construction sector is an area strictly regulated by Latvian law, and a large part of the provisions stipulated by law are imperative, deviations from which are not allowed. The construction participants may reach an agreement within the scope of matters, which are not restricted by law (for example, on the amount of payment for the works). However, if the freedom of contract is restricted in certain matters, the provisions of regulatory enactments prevail and apply over the contractual provisions. Therefore, a construction participant could bring a claim before the CEA also in the case of non-compliance with regulatory enactments, which prevail and apply to the performance of the contract.

Precondition No 3 – the dispute concerns construction of a second group or a third group building, which requires a building permit

According to Article 4 and Annex No 1 of the General Regulations of Construction (Vispārīgie būvnoteikumi), all buildings are divided into three groups, depending on the complexity of the construction and the potential impact on the environment - the first group is the lowest and the third group is the highest. The law stipulates the CEA has jurisdiction only over disputes related to the construction of the most complex buildings - second group and third group buildings. Such buildings are, for example, office buildings, industrial buildings, hotels and other buildings.

However, there is an exception – the CEA does not have jurisdiction over disputes related to the construction of a single one-apartment or two-apartment residential buildings and buildings functionally related thereto. Although, such buildings are usually classified within the second group. Therefore, the CEA will not review disputes relating to, for example, the construction of a single-family buildings, country houses, summer houses and similar buildings.  The CEA will also not have jurisdiction over disputes related to the construction of the first group buildings, including, for example, single-floor buildings with area up to 25 m2. In all such cases, the claim must be brought before a district (city) court, in accordance with the general provisions of jurisdiction.

Enclosing evidence regarding the statement of claim

The statement of claim to the CEA shall be accompanied by relevant evidence, proving the CEA, in fact, has jurisdiction over the dispute, so the court can examine the circumstances and adopt a decision on the commencement of proceedings.  The statement of claim needs to be accompanied by documents proving the existence of contractual obligations between the construction participants, as well as the fact that the construction object in question is a second or third group building, the construction of which requires a building permit.

Representation of construction participants before the CEA

Construction participants may be represented before CEA by a limited circle of persons. Individuals and legal entities may represent themselves or entrust representation to an attorney-at-law. If a legal entity seeks to represent itself, it might entrust representation to its legal representatives (board members), as well as to individuals who are in employment or civil service relationship with the legal entity. This limitation of representatives shall be taken into account when bringing claim before the CEA and also when exercising further procedural steps, such as appealing court decisions and judgements.

Conclusions

The creation of the CEA, which will have jurisdiction over the most complex construction disputes, hopefully, will lead to a more uniform application of the Latvian construction laws and towards the development of a common approach on how to distinguish the liability amongst various construction participants.  This is often not an easy task, considering several construction participants could be held responsible for the same scope of work. At the same time, the legislator has not “imposed” the CEA as the only available option for solving disputes between construction participants. As before, the parties have the right to agree on other dispute resolution mechanisms, for example, arbitration (including international arbitration) or mediation.

 

by Anda Staltmane, Associate, Latvia

Team

Related Experience

VILGERTS assisted Summus Capital OÜ with the issue of unsecured bonds in the amount of EUR 10 million, arranged by Signet bank.  Summus Capital OÜ, established in 2013, is an Estonian-based investment company which has diversified commercial real estate portfolio in the Baltics. The group possesses a portfolio of cashflow generating commercial real estate properties in the retail, office, logistics and medical segments. The VILGERTS team included managing partner, Gints Vilgerts and senior associate, Kristīne Mora.  Other lawyers involved, included Kaido Loor.

Sale of shopping mall “Riga Plaza” to Summus Capital OU and Ivar Vendelin by LSREF3 Latvia Investments S.à r.l. where Vilgerts acted for the buyers.

Assistance to BPM Capital with exit from financing of DEAC and Smiltenes piens with mezzanine loans.

Provision of legal assistance and representing property development company that focuses its operations in Riga in court proceedings and arbitration proceedings concerning non-performance of contractual obligations by a bank and liability thereof.