The Supreme Court has taken a position on the binding nature of a contract in a ruling 2013:47, in which the founding shareholder had, "during the construction stage", entered into the contract with the contractor in the name of the housing company. The question considered by the Supreme Court was whether a contract between a housing company and a contractor is binding by nature or whether such contracts are invalid under chapter 2, section 10 of the Housing Transactions Act.
The concerned parties entered into a fixed-price framework contract on 14.12.2006 and a main contract implemented by invoicing on 27.9.2007. 5.637.000 euros were reserved in the housing company's budget for construction costs, along with 1.462.770 euros for other construction costs.
It was an undisputed fact that the contractor had failed to account for the housing company's financial plan, and, therefore, the contractor had not fulfilled its obligation, under the Housing Transaction Action, to make inquiries.
Housing Transactions Act
The provisions of chapter 2, sections 8 and 10 of the Housing Transactions Act are applicable to the above mentioned case. According to section 8, a housing company may only make commitments in accordance with the financial plan during the construction stage.
According to section 10, if a housing company enters into a legal transaction not in accordance with the financial plan, as required by section 8, such transaction will not bind the company if, inter alia, the other party in the transaction failed to account for the restrictions on the right to contract obligations under the financial plan.
Under the government proposal (HE 14/1994) concerning the Housing Transaction Act, the provisions of chapter 2 of the Housing Transaction Act are mandatory and its safeguarding measures, when the housing shares are offered for sale to consumers during the construction stage. According to the government proposal, in order to protect buyers of housing shares any legal transactions that infringe upon the rights of buyer during the construction stage shall be ineffective.
Under the provision of chapter 2, section 5, the keeper of the "safekeeping documents" shall provide information on restrictions of the right to contract transactions to anyone requiring such information in order to fulfill its duty to make inquiries referred to in section 10.
Financial plan of the housing company
The financial plan is intended to clarify all estimated costs of the construction for buyers of housing shares and other third parties.
In the housing company's budget, the total construction budget was listed as 7.1 million euros. The construction budget was divided in construction costs and other construction costs. No further specification of the budget costs was given. The budget also had no information regarding how the various components of the construction would be divided in proportion to the estimated budget.
The safekeeping documents contained information about the framework contract signed on 14.12.2006, as well as the consulting agreement between the founding shareholder and the housing company. Other subcontracts were not included with the safekeeping documents. The Supreme Court did not take a position on whether the consulting contract was even connected to the safekeeping documents before the main contract was signed on 27.9.2007.
Excess of cost over budget
Under the government proposal, excess of cost over budget has remained disputed. Excess of cost over budget is based on the housing company's financial statements. Financial statements indicate that the budget had been exceeded in 2008. The grounds of the excess of cost were not specified by the Supreme Court's solution.
Duty to make inquiries under the Housing Transaction Act
Under the government proposal, the duty to make inquiries is aimed at protecting buyers of housing shares during the construction stage from the legal transactions of the founding shareholder that could diminish the financial status of such buyer.
According to the Supreme Court, the contractor shall account for both the restrictions on the right to contract obligations apply to the financing plan as well as other documents complementing the financial plan. Such information should be contained in attachments of the other safekeeping contracts. The Supreme Court has ruled that, if the safekeeping contracts are so insufficient that the contractor is unable to ascertain whether the transaction is in compliance with financial plan, the contractor should obtain further clarification from the housing company on the transaction's concerning to transaction the restrictions on the right to contract obligations.
The Supreme Court has not specified when further clarification should be requested. Based on the Supreme Court's ruling, it is appropriate to ask whether a contractor should always ask for further clarification from the housing company in order to safeguard against the contractor failing in its duty to make inquiries.
Conclusions of the Supreme Court
In the case the contractor has not met the obligation to make inquiries from the housing company applied to financial plan in entering into contract with the founding shareholder. The Supreme Court has assessed whether such contracts are contrary to the financial plans, and if so, whether the contractor had been aware of non-compliance or failed to fulfill its duty to make inquiries. According to the Supreme Court, the framework contract that had been included in the safekeeping documents was not contrary to the financial plan, and, thus, it was binding on the housing company.
About the main contract, the Supreme Court stated that the allocated costs of the construction were exceeded in the financing plan before all payments concerning to the contract had been paid, and excess of the costs was partly due to the contractual payments to the contractor. In addition, the main contract had not been included in the safekeeping documents and the contract based on hourly invoicing agreement had not disclosed the total price of the construction.
On those grounds, the Supreme Court held that it cannot be estimated for which costs of the construction in the financial is prepared, and the extent to which can these be considered to be in accordance with the financial plan. According to the Court, if the contractor had properly accounted for the financial plan and requested further information from other safekeeping documents, it would have identified this failure and could have asked for further information about the estimated cost of the main construction of the housing company' financial planning and which are the restrictions on the right to contract obligations under the financing plan.
According to the Supreme Court, the contractor bears the risk of failing to fulfill the obligation to make inquiries and engaging into to the contract contrary to the financial plan and subsequent insufficiency of the legal transaction. The Supreme Court stated that the construction costs based on financial plan were exceeded already before the invoices of main contract had been paid. That is why the contract was not binding on the housing company. Since the agreement was non-binding on the housing company, the contractor was also not entitled to compensation for early termination of the contract.
Comments on Supreme Court's decision
The Supreme Court of the solution has been found that the safekeeping documents contained information about framework contract, as well as the consulting contract between the founding shareholder and the housing company. In addition the date on which the consulting contract was attached to the safekeeping documents, is not clear. On this basis, the contractor had not been able to receive the information before the conclusion of the main contract than any consultancy contract. The contractor had not received information either from other contracts, or the economic impact of such contracts based on the safekeeping documents. The Supreme Court guidelines that the contractor has a very wide-ranging duty to make inquiries, and it means basically that the contractor requests a written evidence about the financial plan from the housing company and is the contract in compliance with the financial plan.
Excess of cost over budget and its causes have not been established. The key question is why the budget has been exceeded. As the other the contracts or the conclusion of such date has not substantiated by evidence, cannot be assessed whether any of the other subcontract entered into after the main contract and it is resulted from something else than the main contract.
The date of the excess of cost over budget had based on the financial statements in 2008. However, when the main contract had signed, the budget had not been exceeded. Excess of cost over budget of the financial plan cannot be reached only due to the main contract. In evaluating of the exceeding would been estimated all concluded contracts and form of these, beginning of enforcement of the contract, price and invoices. Basically, are there other possibly construction works than the main construction?
The Supreme Court's ruling also raises other questions. What is the role of the founding shareholder in such cases? And what is the liability of the founding shareholder in relation to contractor or housing company? Should the housing company has right to require that the construction be made by and at the expense of the contractor? Whether the excess of cost over budget is due to the contractor, how should the housing company finance the construction work when the budget has already been exceeded? Could the contractor stop the construction in a situation where the budget has been exceeded and whether the contractor has liability to complete the construction?
Footnotes
- as defined in the Housing Transaction Act (843/1994).
- referred to as the documents required by decree and relating to the company, its financing plan and construction or repair projects as defined in the Housing Transaction Act.
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