Reduction of EU co-financing due to construction defects

Latvia has access to co-financing from EU funds in the construction field, which is allocated to the manufacturing industry, housing, public infrastructure and other sectors in order to implement energy-efficient solutions, promote the use of renewable energy resources and achieve other specific support objectives.

When supervising such construction projects, co-financed from the EU funds, deviations from the project documents and the requirements of regulatory enactments often are revealed. Such derogations may lead to adjustments (reductions) in the co-financing of EU funds. In case the EU co-financing is reduced due to improperly performed construction works, the customer might raise a relevant question – is the customer entitled to recover the reduced amount of the co-financing as losses from the constructor, who’s improperly performed works caused the reduction of the co-financing.

Generally, the constructor has the obligation to compensate the losses caused to the customer as a result of improperly performed construction works. However, the answer is not that obvious when it comes to reduction of EU co-financing (losses) due to improperly performed construction works. The Supreme Court of the Republic of Latvia (2017) has drawn attention to the fact that the customer as the recipient of EU co-financing shall take all the necessary actions to ensure a proper implementation of the construction project in order not to lose the co-financing from EU funds.

The customer shall implement appropriate control measures already at the handover-acceptance stage of the works, i.e., the customer must carefully check whether the performed construction works comply with the construction project documents and regulatory enactments, and all defects must be eliminated already at this stage. If any defects go unnoticed during the handover-acceptance stage and are later discovered by the institution responsible for supervising the use of EU funds, the customer must take the necessary steps to eliminate these defects, which the customer did not notice during the acceptance stage. If the constructor does not eliminate the defects, the customer must involve other specialists to eliminate the defects and withhold or recover from the constructor the costs related to the elimination of the defects.

The customer’s obligation to take all necessary actions to eliminate defects so that the co-financing of the EU funds is not reduced arises from the basic principle stated in Article 1776 of the Civil Law, according to which the person who might suffer losses shall take the necessary measures to prevent or reduce the losses and he is entitled to recover only those losses which were unavoidable. Namely, the customer as the person who could suffer losses due to the reduction of co-financing, must take all the necessary measures to eliminate the defects in one way or another and to avoid the loss of co-financing.

It is emphasized the customer has the most extensive control over the implementation of the construction project – the customer has the right to check the quality of the works before accepting them, the customer can also apply the necessary measures to ensure successful implementation of the project if the contractor refuses to eliminate the defects, e.g., the customer might invite other contractors to eliminate the defects, as well as the customer might terminate the contract with the respective contractor, who performs the works poorly, and instead hire another, to ensure that that the project implementation is successful.

The Supreme Court (2017) has explained that if the contractor performs the works improperly and the customer, who has the most control over the project implementation, does not take all necessary actions to eliminate the defects in a timely manner, which results in a reduction EU funding, both the contractor and the customer are considered to be jointly responsible for such a reduction. However, the Supreme Court has emphasized the customer is predominantly at fault for the reduction of the co-financing, i.e., the main cause of losses is not the poor quality of the constructor’s work itself, but the customer’s insufficient control over the project implementation, including the failure to notice or eliminate the defects in a timely manner. Therefore, the customer which himself/herself is mainly responsible for the reduction of co-financing, cannot recover the respective losses incurred (i.e., the reduced amount of EU co-financing) from the contractor. However, this does not affect the customer’s right to recover other losses from the contractor, such as the costs related to elimination of the defects.

Considering the abovementioned, the customer as the recipient of EU co-financing shall carefully check the quality of the construction works and take all the necessary measures to timely eliminate the defects and the discrepancies in order to avoid the reduction of the co-financing. However, it should be emphasized that the customer might not be the primarily responsible party in all situations when the co-financing is reduced. In order to determine which of the parties involved in the construction project is primarily responsible for the losses and from which of the parties the losses could be recovered, it is necessary to carefully assess the individual circumstances of each situation, including the content of the contracts, the distribution of rights, obligations and risks between the parties, the construction documents, the requirements specified in regulatory enactments and other circumstances.

by Anda Staltmane, Associate, Latvia


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