Construction 2024 Comparisons

The principal source of law governing private construction is the Civil Code (Articles 1655 et seq). Public construction is specifically regulated by the Public Construction Code.

Additional laws and regulations apply depending on the object of the construction. By way of example, the Unified Building Act (Testo Unico dell’Edilizia) and the Town Planning Law (Legge Urbanistica) only apply to the construction of buildings.

Different standard forms of domestic construction contract can be found and adopted but there is neither a prevailing nor a mandatory one. Standard contract forms/templates are published by different entities, such as Chambers of Commerce or professional associations.

International standard forms, such as FIDIC (Fédération Internationale des Ingénieurs-Conseils, or International Federation of Consulting Engineers) or NEC (New Engineering Contract), are not common in the domestic construction context. However, their adoption is more widespread – even if subject to extensive negotiations – in international construction projects, where the contract template is usually proposed by the financiers or by the employers.

The Italian construction market features different types of employers, represented mainly by institutional investors, real estate funds, private owners/developers/investors and public entities.

The main rights and obligations of the employer are determined by the underlying contract and by the applicable laws. By way of great simplification, the employer’s primary obligation is the payment of the price in accordance with the contractually established payment milestones. Additional key obligations are the grant of site access and, upon completion of the works, their verification and acceptance. In exchange, the employer has the right to receive the construction duly executed in accordance with the contract within the agreed delivery date, and request the remedy of defects and variations in accordance with the underlying contract.

In private construction projects, the different players usually enter into separate contracts, such as:

• the finance contract between the employer and its financier, with relevant securities;
• the construction contract between the employer and the contractor;
• the subcontracts between contractors and subcontractors; and
• the design contract between the architect firm or the engineering company and the employer.

Direct agreements, multiparty agreements or accession agreements are not widespread in Italian private construction projects. However, direct agreements between the contractor and the financiers are used in project finance where usually certain contractual warranties or undertakings of the contractor vis-à-vis the employer are assigned and/or transferred by the employer to its financiers (to secure the lenders’ interests).

Different types of companies act as contractors, depending on the size and the specifics of the construction project.

The rights and obligations of the contractor in a construction project are determined by the contract, by the Civil Code and by the other applicable laws depending on the object of the construction. By way of great simplification, the main obligations of contractors are:

• the performance and completion of the construction works within the delivery date in full compliance with the contract and the project specifications;
• the delivery of the contractual documents; and
• the remedy of any defect in the works.

In return, the contractor has the right to receive the payment of the contract price as per the contractual instalments and to obtain the acceptance of works provided that, upon completion, they are compliant with the contractual provisions.

For more on the general relationship between the contractor, the employer, the subcontractors and the financiers, see 2.1 The Employer.

In Italy, subcontractors are typically rather small companies specialised in a particular field. Usually, the contractual relation with the subcontractors is held by the general contractor and not by the employer or the financiers.

The employer is not liable to pay a subcontractor directly. However, pursuant to Article 29, paragraph 2 of Legislative Decree No 276/2003, the employer is jointly liable with the contractor and with the subcontractor for the payment of any salary and/or social security contributions of the subcontractor’s employees for the period of performance of the works.

This liability is subject to a time bar of two years from the completion of the relevant works.

Private construction projects are financed mainly by banks or real estate funds whereby the employer takes out a loan with the respective bank and undertakes to repay it in instalments by means of mortgage interest. Direct agreements, step-in rights or other rights vis-à-vis the contractors or subcontractors are used in major energy and industrial plant projects but are not common in the other industries.

Public works are mainly financed by the government, by local institutions, by the EU or by public private partnerships.

Depending on the object of the construction, architectural firms and/or engineering companies are normally appointed to carry out the project design. In the industrial and energy field, it is also common that the contractor takes care of the design of the project (engineering, procurement and construction (EPC) contractor).

The relation between the designer and the employer is regulated by a design agreement from which contractual liability arises. The designer’s obligation is of result and shall be performed with diligence (see 3.3 Design).

The designer always maintains the moral rights over its project, even if the design of the project is the scope of the design agreement.

The scope of the works is an essential element of the construction contract.

Generally, the scope of works is briefly identified in the body of the contract and it is detailed in one or more contractual attachments, which usually consist of the following documents:

• design documents (drawings, engineering studies, etc);
• employer’s requirements;
• technical specifications;
• bill of quantities, bill of materials and components with relevant specifications; and
• technical standards and regulations applicable to the works.

The level of detail of the scope of works depends on the type of construction contract.

According to Article 1661 of the Civil Code, the employer is entitled to order variations not exceeding one-sixth of the contract price provided that, in this case, the contractor is entitled to compensation for the additional works performed. However, a written agreement signed by the parties is required, if the variation ‒ despite not exceeding the above-mentioned limit ‒ materially alters the nature of the work or the extent of a specific activity. This provision is normally waived or amended by the parties by extending the duty of the contractor to perform the variations and limiting its rights to additional compensation.

According to Article 1659 of the Civil Code, the contractor cannot vary the works, unless the variation is agreed by the employer in writing. In such a case, if the contract is a lump sum contract, the contractor is not entitled to additional compensation for the variation proposed ‒ unless a different agreement between the parties is reached. This provision is normally mitigated in construction contracts by the inclusion of the contractor’s right to additional compensation to be calculated on the basis of the prices indicated in the contractual bill of quantities/schedule of values for similar works or on the average construction rates applicable in the market of reference for similar works.

It is common that the designer is appointed directly by the employer through the execution of a designing agreement. The designer is subject to contractual liability and shall perform their obligations with diligence, to be assessed with reference to the nature of the performed activity in accordance with Article 1176 of the Civil Code. However, if the design object of the professional appointment implies the solution of technical problems of particular difficulty, the designer is liable only in case of gross negligence or wilful misconduct, pursuant to Article 2236 of the Civil Code.

Depending on the peculiarities of the project, different contractual schemes can be adopted. In fact, the employer may decide to appoint:

• a general contractor, which bears the risk of the entire construction including the selection, the management, and the co-ordination of all subcontractors and suppliers;
• a main contractor, which performs the main portion of the construction managing its own subcontractors and supplier in co-ordination with other contractors appointed by the employer;
• various main contractors performing different portions of the project (such as the mechanical part, the electrical part, etc), each managing its own subcontractors; or
• different individual contractors with a highly fragmented risk allocation.

Contracts that place both design and construction obligations upon the contractor are primarily realised through the form of integrated design-build contracts or EPC contracts, mainly used in the field of industrial and energy plants.

Co-operation between different contractors (especially for participation in tenders) is achieved either:

• through joint venture agreements, with the establishment of a joint venture corporate entity; or
• more commonly, by concluding co-operation contracts (typically consortiums or associazione temporanea di imprese).

The employer is typically responsible for the status of the construction site. Article 1664 of the Civil Code provides that if ‒ during the execution of the project – geological, hydrological or similar difficulties arise, which were not foreseen by the parties and which make the performance of the contract considerably more onerous for the contractor, the contractor is entitled to receive an equitable indemnification in connection therewith.

This provision is usually extensively negotiated, depending on the peculiarities of the project and in consideration of which party takes the responsibility for carrying out the ground/underground surveys.

The permits required for a construction project depend on the object of the construction. By way of example, the permit that typically must be obtained by the employer for the realisation of major renewable power plants is the unified authorisation (autorizzazione unica), whereas the permit that typically must be obtained by the employer for buildings construction is the building permit (permesso di costruire).

The construction contract typically regulates the allocation of risk for the obtainment of the different main permits.

The Civil Code does not include specific maintenance provisions and the general rule is that – after the project delivery and takeover ‒ the employer (or the owner of the construction, in case it is a different entity) shall take care of the maintenance of the construction, being for this purpose free to appoint any contractor of its choice.

However, in certain types of construction (such as of industrial plants), it is common that contractor is appointed to carry out the maintenance of the plant and often the contractors agree to extend the defect liability period only in the event of subscription of a maintenance order.

It is not common to delegate other functions to the contractor in addition to those already described. However, in renewable energies projects, it is common that the employer and contractor also enter into a separate operation and maintenance (O&M) contract to operate and maintain the project works.

Tests for completion of the works are usually identified in the contract and must be performed by the contractor, which bears the responsibility for the testing process. Usually, the employer is entitled to participate in the tests.

Upon completion of the works, the employer has the right pursuant to Article 1665 of the Civil Code to perform the final inspection of the works before receiving their delivery. To this purpose, the contractor shall invite the employer to inspect and verify the completed works. In the event that, after such invitation, the employer fails – without reasons ‒ to carry out the final inspection or to communicate its outcome within a reasonably short period of time, the works are deemed accepted. In the event that the employer accepts the delivery of the works, without reservation, the works are deemed accepted.

It must, however, be highlighted that it is common contractual practice to waive (or at least mitigate) the “deemed acceptance” principle and to precisely detail the requirements to achieve the completion, takeover and delivery of the works.

Pursuant to Article 1667 of the Civil Code, the contractor is responsible for the defects and the non-compliance of the works, unless the employer has accepted the works and the defects were known or easily recognisable to the employer. The contractor is responsible in case of hidden defects.

After the completion of the works, the employer shall notify to the contractor any defect found within 60 days from the discovery and the respective legal proceedings must be commenced within two years from completion of the works. The notification of a defect is not necessary in the event that the contractor recognised or has hidden the defect.

The employer is entitled, pursuant to Article 1668 of the Civil Code, to request the contractor to repair the defect or to obtain a price reduction ‒ in addition to the reimbursement of damages ‒ if the contractor’s fault is proven. However, in the case of substantial defects that make the work completely unfit for the contractually intended purpose, the employer is entitled to termination.

The remedies set forth by law can be excluded or limited, except in the case of gross negligence and wilful misconduct. Therefore, the defect liability clause is usually extensively negotiated between the parties.

With reference to the construction of buildings or other real estate, Article 1669 of the Civil Code provides for the statutory ten-year liability of the contractor in the case of collapse, risk of collapse, or other major defects deriving from defects of the soil or defective construction. This special form of liability, which can neither be derogated nor modified by the contracting parties, is a liability in tort that creates a sort of presumption of fault on the part of the contractor (who therefore has the burden of proving its lack of liability).

The contract price is usually established following two different methods, which are foreseen by Article 1657 of the Civil Code:

• lump sum basis, where the contract price is fixed and firm and the contractor thereby assumes the risk of improper evaluation of the works to be done; or
• time-spent basis or unit-price basis (so-called appalto a misura), whereby the employer pays the contractor on the basis of the works actually performed by the contractor.

The contractual payment schedule on a “milestone” basis is very common and usually is based on the (monthly/bi-monthly) progress of the works, as certified by the project manager/director of the works (see 4.4 Invoicing and 9.5 Retention and Suspension Rights).

Indexation of prices is used in construction projects.

The risk of unexpected excessive price fluctuations is specifically addressed in Article 1664 of the Civil Code, which allows a price adjustment if – as a result of unforeseeable circumstances ‒ an increase or decrease in the cost of the materials or labour causes an increase or decrease of more than one-tenth of the total price agreed upon.

This rule of law can be waived by the parties and this is quite common. However, the drastic market price fluctuations experienced in the past few years (as a consequence of the pandemic and the Ukraine war) made the inclusion of automatic price adjustment clauses more common than was the case previously.

The prevention of late payments usually is achieved by the inclusion in the contract of a payment schedule that takes into consideration the progress of the works (so-called pagamento a stato avanzamento lavori).

If the employer fails to honour its payment obligations on time, the contractor has the right to suspend the performance of the works pursuant to Article 1460 of the Civil Code (see 9.5 Retention and Suspension Rights). This rule is quite often invoked by contractors in order to avoid the delivery of the promised works where there has been a failure by the employer to pay the relevant price instalments. In addition, the creditor is entitled to receive interest (the rate of which can be either agreed between the parties or can be the one established by law).

In construction contracts, it is typical that the contractor receives an advance payment (usually the 10%) of the contract price; subsequent interim payments are based on the monthly or bi-monthly progress of the works certified by the project manager/director of the works and the employer or on the achievement of contractually established milestones.

Pursuant to Article 1665 of the Civil Code, the parties are free to determine the payment schedule in the contractual agreement. Invoices shall be issued by the contractor accordingly. The wire transfer is the generally adopted method of payment, as the payment traceability must be ensured. In the absence of a contractual agreement, the payment schedule must be determined in accordance with customary practices. In their absence, the contractor has the right to be paid once the works are accepted by the employer. However, this last scenario is extremely rare in practice.

Time for completion and general planning are usually agreed in the construction contract. Time for completion can either be a fixed date or a fixed number of days following the contract coming into force. The role of the parties in project planning depends on the project and usually is set up in the contract.

From a general perspective, it is typical that the employer sets up the general project timing assigning the main targets and that the contractor ‒ through its project manager – prepares the detailed planning of the works. This scheme can, however, vary depending on the number of contractors present on site. By way of example, if the project does not feature a general contractor, the co-ordination and the general planning of the works shall be organised by the employer who usually appoints its architect or the director of the works.

Milestones and milestone payments are very common in the construction industry, as detailed in 4.1 Contract Price. Payment certificates are not very common and are used only in more complex and structured projects.

In the event of delays, construction contracts generally allow the employer to claim payment of delay liquidated damages, whereas the termination remedy is usually reserved for material delays exceeding thresholds predetermined in the agreement.

According to Article 1382 of the Civil Code, the parties are free to include in their contract a clausola penale under which, in the case of particular contractual breaches (such as late completion/delivery), liquidated damages shall be paid by the contractor to the employer. Such clause exempts the employer from proof of damage.

Parties are free to agree that further damages may be claimed in addition to the liquidated damages. Liquidated damages may be reduced ex officio by the judge if the agreed sum is manifestly excessive or the main contractual obligation has been only partially unperformed.

In case of delay, the contractor does not bear the consequences thereof only if it is able to prove that the delay was exclusively caused by an event beyond its control (such as a force majeure event or a fault of the employer). Whenever the delay is caused by the fault of the contractor only in part, the contractor is not automatically entitled to benefit from any extension of time or to receive reimbursement of costs.

In the event that the completion of the works is delayed by the contractor without excuses, the construction contracts typically provide the employer’s right to:

• claim the adoption of extraordinary acceleration measures;
• claim delay liquidated damages up to a maximum cap set out in the contract; and
• terminate the contract when the delay penalties reach the cap contractually pre-established.

Performance of the works by the contractor within the timeframe agreed upon between the parties is a key element of the construction contract; therefore, in the event of delay, the contractor is entitled to claim a time extension only if it is able to prove that the delay was exclusively caused by an event beyond its control (usually by a force majeure event or by a fault of the employer or by a third party that is not under its own liability). Extension of time shall be requested by the contractor through a written claim to the employer following the contractual requirement regarding notices, if any. The contractor shall bear the burden of evidencing and documenting the delay suffered and the underlying reasons, which shall be attributable to events outside the contractor’s responsibility.

Italian law does not include an exact definition of force majeure, which is usually interpreted by case law as an event of objective unpredictability and extraordinariness that renders the obligation impossible to be performed. Despite the foregoing, force majeure finds its grounds in different provisions of the Civil Code, such as:

• in Article 1218, which states that a contractual party not exactly performing his obligation, is not liable for damages if it proves that the non-performance or delay was due to impossibility of performance for a cause not attributable to it;
• in Article 1256, which provides that an obligation is extinguished when its performance becomes impossible for a cause not attributable to the obliged party; and
• in Article 1672, which provides that the construction contract is terminated if the execution of the works has become impossible owing to a cause that is not attributable to the parties.

In construction contracts, the parties are free to limit or exclude certain circumstances from being qualified as force majeure, provided that this limitation is not against mandatory rules that cannot be derogated by the parties.

It is common practice to:

• define force majeure events as events, beyond the contractor’s control, that prevent the contractor from performing its obligations and that cannot be avoided nor reasonably foreseen; and
• provide that force majeure events relieve the affected party from liability and cause the extinguishment of the relevant obligation and the termination of the contract, usually after a pre-agreed period of time.

If, during the execution of the project, geological, hydrological or similar difficulties arise that are not foreseen by the parties and make the performance of the contract considerably more onerous for the contractor, the contractor is entitled to receive an equitable indemnification in connection therewith, according to Article 1664 of the Civil Code.

However, unforeseen circumstances clauses are usually extensively negotiated, depending on the peculiarities of the project and on which party is performing the ground/underground survey (if any).

Disruption is acknowledged by our system as a legal ground for obtaining a time extension and the cost compensation to the extent that the contractor proves that the disruption was due to causes not attributable to him. In fact, according to Article 1218 of the Civil Code, the obliged party “who does not exactly perform [their] obligation is liable for damages, unless [they prove] that the non-performance or delay was due to impossibility of performance for a cause not attributable to [them]”.

In the case of disruption, and absence of concurrent causes of delays attributable to the contractor, the latter is usually entitled to an extension of time and payment of the additional suffered costs.

According to Article 1229 of the Civil Code, the liability for damages cannot be contractually excluded in the case of gross negligence or wilful misconduct or in the case of breach of public order rules (see 6.3 Limitation of Liability).

The concepts of wilful misconduct and gross negligence are specifically recalled by Article 1229 of the Civil Code (see 6.1 Exclusion of Liability). Italian law does not contain a precise definition of the two concepts, which are in any case defined and described by the case law and the authors as:

• gross negligence – the complete disregard not only for the ordinary diligence but also for the minimum levels of attention, prudence and competence necessary to perform the relevant obligation; and
• wilful misconduct – the wilful and conscious disregard for harmful, avoidable and reasonably foreseeable consequences.

Under Italian law, the parties are free to contractually agree limitation of liability clauses. According to Article 1229 of the Civil Code, these clauses are null and void if they exclude or reduce the debtor’s liability in the case of gross negligence, wilful misconduct or breach of public order rules (See 6.1 Exclusion of Liability).

Limitation of liability clauses are largely adopted and extensively negotiated between the parties. However, in cases where the contract is executed under the general terms and conditions of one party, the limitation of liability clause can be enforced only if specifically approved in writing by the other party.

Construction contracts typically include a cap on liabilities, usually consisting of:

• the limitation of the damage compensation to an amount equal to the contract price or to a percentage thereof; and
• the exclusion of consequential and indirect damages unless they refer to people’s injuries/death or are caused by gross negligence, wilful misconduct or breach of public order rules.

Indemnities commonly granted in construction contracts for energy, industrial and infrastructure projects by the contractor to the employer are in respect of:

• personal injury to, or death of, any person arising from or caused by the performance of the works, except to the extent due to any act or neglect of the employer;
• any loss, injury or damage to any property, due to the carrying out of the works, and to the extent due to any negligence, breach of statutory duty, omission or default of the contractor; and
• infringement of IP rights.

Employers generally require contractors to provide guarantees to secure the proper fulfilment of their obligations. The most common guarantees requested are:

• an advance payment bond, to secure the repayment of advance payment effected to the contractor (if any);
• a performance bond, to secure proper performance of the contractual obligations by the contractor; and
• a warranty bond, to secure the fulfilment of warranty obligations by the contractor.

Bonds are usually requested to be first-demand bonds issued by banks or by insurance companies. First-demand bonds are autonomous guarantees that can be called upon simple written demand to the issuing bank/insurance.

Corporate guarantees to be provided by parent or sister companies are quite commonly requested by employers, especially in order to secure the obligations of contractors that:

• are special-purpose vehicles; or
• form part of corporate groups structured in a plurality of companies.

Parent company guarantees could be also requested by contractors in case of unsatisfactory financial strength of the employer.

The contractor must provide insurance covering its employees and workers against work accidents and occupational diseases, through the National Institute for Insurance against Accidents at Work (Istituto Nazionale per l'Assicurazione contro gli Infortuni sul Lavoro, or INAIL). In addition, contractors are generally requested to have:

• contractors’ all-risk insurance (covering all risks connected with the works equipment and civil liability for damages caused to third parties during the execution of the works); and
• erection all-risk insurance (covering the insured against all risks that may occur during the erection and commissioning phase).

Different and additional kinds of insurance are normally requested, depending on the peculiarities of the project (such as decennial insurance, covering the risks of total or partial collapse of the building due to a defect of the construction).

Pursuant to Article 81 of the Italian Bankruptcy Law and Article 186 of the Insolvency Code, a construction contract is automatically terminated in the case of bankruptcy or judicial winding-up of either party, unless the receiver ‒ after having obtained authorisation from the creditors’ committee ‒ informs the other party of its intention to continue the contractual relationship by notice in writing to be sent within 60 days following the declaration of insolvency or following the procedure opening (as applicable) and grants adequate guarantees.

In the case of bankruptcy or judicial winding-up of the contractor, and in the event that the identity and the specific characters of the same contractor were of the essence in the employer’s decision to enter into the contract, the contract terminates upon bankruptcy of the contractor ‒ unless the employer agrees that the contractual relationship may continue.

For detail of the division of responsibility during the construction process, please refer to 3.4 Construction.

The allocation of contractual risks is usually negotiated between the parties and different approaches can be taken depending on the peculiarity of the project. Price contingencies are included in the contract in order to hedge the risks assumed.

All the personnel employed in a construction contract must be regularly hired. The compliance with the applicable collective labour agreement and payment of all the personnel wages and taxes must be ensured.

Construction contracts typically include provisions regulating the registration of all the persons employed on the construction site, the health and safety of personnel, key persons and their replacement, unlawful employment and procedures to comply with in case of major labour accidents.

Furthermore, it is typical that contracts include specific indemnities clauses granted by the contractor in favour of the employer in case of breach of mandatory minimum wage requirements or lack of payments of personnel’s wages or taxes.

According to Article 1656 of the Civil Code, subcontracting is admitted only if specifically authorised by the employer. In such a case, the contractor is entitled to enter into a subcontract agreement with the subcontractor having as its scope the performance of a portion of the works that the contractor must perform for the employer under the construction contract.

The subcontract’s provisions can be specifically negotiated or drafted on a “back-to-back” basis (which means that the rights and obligations of the subcontractor towards the contractor are specular to those of the main contractor towards the employer).

According to Article 1670 of the Civil Code, in the event that the subcontractor’s works are defective, the contractor’s recourse action against the subcontractor is subject to mandatory notice to be sent by the contractor within 60 days following the notice of defects. This rule is often derogated by the parties in order to reflect the main contract provisions related to defect warranty.

As regards subcontracts, see also 2.3 The Subcontractors.

IP of the construction design(s) is owned by its designer (who can be the contractor if under the contract the contractor is also in charge of construction design). The designer usually grants to the employer an irrevocable, royalty-free, non-exclusive licence to use such designs for the operation, repair and maintenance of the contractual works.

Under Italian law, there are several remedies available to the parties when it comes to breach of the contractual obligation.

From a general perspective, each party (employer, contractor, designer, etc) is entitled to obtain the performance of all contractual obligations by the other party. If one party breaches its contractual obligations, the other party is generally entitled to claim either specific performance or substitute performance, in addition to damages compensation. In the event of material breach, the non-defaulting party is also entitled to terminate the contract and claim damages compensation.

The employer, in the event of defects in the works, is entitled to obtain their rectification/remedy or the reduction of the contract price and to claim damages compensation. In addition, if the defects deprive the employer of the whole benefit of the project because the works are completely unfit for the contract purposes, the employer is entitled to obtain the termination of the contract.

The contractor, in the event that an employer fails to timeously pay the contractual instalments, is entitled to suspend the performance of its obligations pursuant to Article 1460 of the Civil Code ‒ unless, in consideration of the specific circumstances, the suspension is in breach of the good faith principle ‒ and to claim the statutory interest. Conversely, in the absence of specific contractual provisions, the employer is entitled to suspend its payment obligations in the event of breach of contract by the contractor in accordance with the same law principle.

It is common practice to try to limit the remedies of the parties, especially when they can adversely impact the project execution. Therefore, in construction contracts, it is common to provide for clauses allowing the contractor to suspend the performance of the works only if and to the extent that the lack of payment exceeds pre-established periods of time. In major industrial and energy construction projects, it is not uncommon that the successful rectification/remedy of defects during the defect warranty period exclude the compensation of additional damages.

Under Italian law, the parties are entitled to include sole remedy clauses in construction contracts. This kind of clause is quite common in energy, infrastructure and industrial plant projects, especially with regard to delay liquidated damages and remedy of defects.

In the case of breach of a sole remedy clause, the enforcement is subject to a court’s decision (an arbitration award if an arbitration clause is included in the contract).

Italian law allows the parties to contractually exclude certain categories of damages by including a limitation clause in the contract. Even if it cannot be considered a standard practice, it is quite common that contractors try to contractually exclude any liability related to loss of profit and/or indirect or consequential damages/loss.

Damages cannot be excluded in a case where the damage is caused by wilful misconduct, gross negligence, in the event of death or personal injuries, and if the exclusion is contrary to public order provisions or fundamental rights.

Retention

The law does not provide for any automatic retention rights in favour of the employer. Retention rights are typically regulated by the parties in the construction contract and it is common for the employer to retain a certain amount (5–10% of each payment) from each milestone payment to secure the contractual performance. In general, the amounts retained are released in favour of the contractor upon the achievement of the subsequent milestone and/or after the delivery of the main material and/or after the completion and acceptance of the works. The same may apply in respect of the expiry of the defect liability period but, in this case, issuance of a specific bond is usually preferred.

Suspension

Pursuant to Article 1460 of the Civil Code, each party may suspend performance of its obligations in the event that the other party is in breach of its own corresponding obligations. This provision can be derogated by the parties in the contract.

Termination

Each party may invoke termination of contract for a material default of the other party pursuant to Article 1454 of the Civil Code. Termination for default is subject to prior written notice to the other party containing a request to cure the default within a reasonable period, which shall be at least 15 calendar days. If the default remains unremedied, at the end of the notice period, the contract is terminated and the non-defaulting party shall be entitled to claim the damage compensation.

In addition, the parties may agree the right of automatic contractual termination in the case of breach of specific and identified contractual obligations pursuant to Article 1456 of the Civil Code. This remedy is typically foreseen in the event of excessive delay exceeding the maximum caps established in the contract or in the event of non-conformities with regard to the contractually established thresholds.

Termination under the Italian law has a retroactive effect, with exception made for contracts with continuous or periodic performance, in respect of which the effect of termination does not extend to obligations already performed. The retroactive effect does not regard the rights acquired by third parties. However, it often happens that the retroactive effect of the termination is amended or eliminated by the parties in the contractual stipulations.

Withdrawal

Pursuant to Article 1671 of the Civil Code, the employer has the right to withdraw from a construction contract at any time and for any reason, even if the execution of works has already been commenced.

Withdrawal under Italian law does not have retroactive effect. The employer shall compensate the contractor for the incurred costs, the works already performed and loss of profit.

Construction disputes are decided by court or resolved in arbitration. In Italy, there are no specialised courts dealing with private construction disputes, which are therefore subject to the jurisdiction of the ordinary courts.

In Italy, there are different ADR methods available to the parties, mainly including arbitration, mediation and assisted negotiation.

The resolution of disputes through arbitration is commonly foreseen in construction contracts, which can either foresee institutional or non-institutional arbitration. In the first case, the rules of the relevant institution administering the arbitration apply. Conversely, in the non-institutional procedures, the underlying rules are determined by the parties and any lack is integrated by the provisions of the Code of Civil Procedure. The most important Italian arbitral institution is the Milan Chamber of Arbitration (Camera Arbitrale di Milano, or CAM).

A specific arbitration procedure is established by the Italian legislature under Article 213 of the Public Construction Code, in order to adjudicate disputes on subjective rights deriving from public tenders. The use of other alternative means of dispute resolution is neither widespread nor compulsory, even if the recourse to mediation procedures is slowly increasing.