In Portugal, the legal regime applicable to construction is currently scattered over several laws and decree-laws. The main ones are:

• the Portuguese Civil Code (Decree-law 47344/66, of 25 November) – which, with the exception of a few mandatory provisions, establishes a largely complementary framework of norms;
• Law 41/2015, of 3 June – which regulates the formal requirements of construction activity, including (i) the legal requirements/qualifications for an entity to perform construction activities in Portugal, and (ii) the requirements of construction contracts;
• Law 31/2009, of 3 July – which establishes professional qualification requirements for technicians (eg, architects or engineers) involved in the design, supervision and management of construction works;
• the Legal regime of Urban Planning and Building (Decree-Law 555/99, of 16 December) – which generally regulates urban planning and edification, including the description of licensing procedures;
• the Legal regime of Urban Rehabilitation (Decree-Law 307/2009, of 23 October) – which regulates urban rehabilitation;
• Decree-Law 273/2003, of 29 October – which regulates health and safety matters with respect to construction sites.

[All of the above are applicable to both public and private construction works.]

• the Public Procurement Code (Decree-Law 18/2008, of 29 January) – which establishes the rules applicable to public construction; and
• Ordinance 255/2023, of 7 August – which defines the mandatory content of public works execution design, as well as the procedures and standards to be adopted in the preparation and phasing of public works projects.

[Applicable to public works.]

The most common practice is still the use of bespoke drafts, as there is no mandatory form (apart from some specific rules regarding the information to be included in the construction contracts, as required by Law 41/2015). The use of FIDIC, or at least contracts inspired in FIDIC models, may occur in contracts of a relevant value, between international employers and/or contractors.

Public construction contracts usually reproduce applicable mandatory and supplementary legal rules (specified in the tender documents), since in the case of public works, these are much more extensive than the norms applicable to private works.

Any kind of company or individual can act as an employer in a construction contract.

In general, its main rights include:

• to have the work carried out completely, on time and as agreed; and
• to supervise the execution of the works.

On the other hand, the employer is responsible for:

• handing over the site to the contractor;
• paying the contract price on time;
• cooperating with the contractor to the extent necessary to enable them to carry out the works;
• licensing the works (unless the contract provides otherwise); and
• accepting the works if they are carried out without defects and in accordance with what has been agreed.

The relationship between the employer and the contractor is the most fundamental for the performance and completion of the works. However, frequently, there is the need for involvement of other entities, such as subcontractors and financiers (specially in major construction projects).

Typically, subcontractors are required and authorised by the employer to assist the contractor in carrying out the work. Subcontracting may be subject to prior approval by the employer. Subcontractors are hired directly by the contractor and usually have no direct relationship with the employer. In some construction contracts, there are subcontractors appointed by the employer to carry out specific works.

In the case of project finance structures, although the financiers will enter into a financing agreement with the employer, they will usually require direct agreements to be entered into between the employer, the financiers and the contractor, namely to secure the rights of the financiers in relation to the construction contract, namely a step in right in the event of default by the employer and with certain matters being subject to their approval or acknowledgment.

Contractors may be either companies or individuals, if they are duly authorised to carry out construction work in Portugal by means of a licence, certificate or registration, which requirements are provided by law. In any case, for reasons of risk limitation, contractors usually take the form of companies (especially private limited companies or single-member companies).

The main rights of the contractor include:

• being paid the contract price on time; and
• right of retention of the works in the event of non-payment of the contract price.

Its main obligations are:

• carry out the works in a complete and timely manner and in accordance with the agreed specifications;
• provide all materials, equipment and labour necessary for the works (unless otherwise agreed);
• maintain the works and site until provisional acceptance by the employer.

Subcontractors on construction projects in Portugal tend to be smaller companies (also duly authorised to carry out construction work in Portugal by means of a licence, certificate or registration) specialised in specific types of work. However, with contractors increasingly becoming project managers with fewer resources of their own, subcontractors are becoming more relevant on projects. It is not uncommon for the main construction contract to provide for nominated subcontractors, because of their expertise, experience, or financial status.

In terms of rights and obligations, the relationship between contractor and subcontractor is very similar to that between employer and contractor. Therefore, the subcontractor has the same rights and obligations towards the contractor as the contractor has towards the employer, although the benefit of the subcontractor’s work ultimately belongs to the employer. Depending on the size of the subcontractor and the importance of the work it provides, a back-to-back arrangement with the main contract may be established.

In any case, the contractor is solely responsible to the employer for all the work to be carried out by its subcontractors.

In public works, the regime is similar, but with legal restrictions. Only 75% of the work may be subcontracted. The subcontract must be in writing and contain several mandatory details. During the execution of the works, the contractor may subcontract, without the prior authorisation of the employer, if it complies with the aforementioned requirements, except in cases where the specific nature of the works requires special qualifications and expertise that the employer has assessed during the tendering phase. The contractor must inform the employer within five days of the granting of subcontracts. 

Significant construction projects, such as large-scale renewable energy projects, often require financing from third parties such as banks or funds.

This leads to the conclusion of financing agreements between employers and financiers, and in certain cases direct agreement between the financiers, the employer and the contractors. Typically, the subcontractors are not part of these direct agreements. 

The main rights often conferred on financiers under direct agreements are the ability to make direct payments to contractors in the event of default or threatened default by the employer (which may jeopardise the deadlines of the project), or the right to take over the employer's contractual position in the construction contract in the event of threatened termination by the contractor.

The main obligation of the financier is, of course, to provide the cash required to finance the construction project.

In construction projects, the employer typically contracts specialised firms to create architectural and specialty plans, which are then handed over to the contractor in the construction phase. These plans must be signed by qualified architects and engineers in accordance with Portuguese legislation. For larger or more complex projects, the contractor may take on the design, either partially or entirely, using a design-build approach.

However, in public works, the use of the design-build model is considered exceptional by law. It is only permitted in well-substantiated cases where the contractor is required, as per the contract documents, to assume responsibilities for the works’ outcomes or when the construction process’s technical complexity requires the involvement of tenderers in the design due to their specialised technical expertise.

The scope of a construction contract depends on the nature of the work. It may cover both design and construction or only construction. The contract usually defines the works as all the work required to complete the project to the agreed specifications, including preliminary and ancillary work not specifically included in the contract documents but necessary to complete the project. In a design and build contract, the scope is defined by, among other things, the client's requirements, which detail the design specifications. In a pure construction contract, the scope is defined by, among other things, the approved execution design.

For public construction contracts, the general rule is the construction contract, based on a final design. However, according to the law, there are limited cases in which the public employer may contract on a design and build basis, in which case there must be a preliminary programme. The content of both the final design and of the preliminary programme are defined by law.

The Portuguese Civil Code generally regulates variation in private works construction contracts, distinguishing between (i) contractor’s variations, (ii) necessary variations and (iii) employer’s variations.

Although construction contracts do contain specific variation clauses, the Civil Code set some limits on variations.

Contractor’s Variations

In general, they are not allowed without the prior approval of the employer.

Necessary Variations

The parties must agree on its consequences (in terms of price and time). If parties cannot reach agreement, the competent court will determine the consequences of the variation.

Employer’s Variations

The contracting authority is entitled to order variations provided that (i) their value does not exceed 20% of the contract price (in case of additional work) and (ii) they do not result in a change in the nature of the works.

If the variation results in a reduction of the work, the contractor shall be entitled to the price of the reduced work, less the amount saved or earned by the contractor in other areas of its activity.

The concrete definition of the impact of each variation in price and time is usually made taking into account the agreed bill of quantities and unit price list (and time limits applicable to each type of work) or, if the variation requires the performance of works not listed in these contract documents, market prices and time limits are usually requested from the contractor for approval by the contracting authority.

In any case, construction contracts are often very prescriptive about variations, in particular about their consequences and the limits on the right to vary referred to above.

In public contracts, variations in scope and price are provided by law and are subject to mandatory legal requirements. Variations in scope, when admissible, may imply an increase or a decrease in the contract price. When, as a result of a variation, the work carried out by the contractor is more than 20% lower than the initial contract price, the contractor is entitled to compensation corresponding to 10% of the value of the difference, to be settled with the final account for the contract.

The division of responsibilities for the design of a private works project depends on the specific framework of the relationship to be established between the parties. The parties may enter into a (i) design and build contract, under which the contractor is responsible for the design and construction of the works, or a (ii) construction contract, under which the contractor is obliged to carry out the works necessary to construct the project in accordance with the design documents prepared by the employer's architects/engineers.

While in a design and build contract all responsibility for the design initially rests with the contractor, construction contracts often require the contractor to review or revise the design documents provided by the employer, making the contractor responsible for errors and/or omissions in those documents (and for any works required as a result of unidentified errors and/or omissions). The extent of the design errors and omissions that are passed on to the contractor (discrepancies in the design documentation, omissions in the design documentation, missing works or quantities in the bill of quantities, etc) may vary from contract to contract.

In public contracts, in the case of a design and build contract, the contractor is responsible for any additional work to correct the relevant errors and omissions, unless these are caused by the elements prepared or provided by the contracting authority. In the case of a construction contract (construction only), there are statutory time limits for the contractor to claim errors and omissions in the design, after which the contractor is responsible for any additional work aimed at correcting the errors and omissions that have not been claimed. The designer can be held liable by a court decision, brought by the contractor or the employer, for the extra work due to errors and omissions in the design, but limited to three times the design contract fee, except in the case of intent or gross negligence on the part of the designer.

In construction projects, the primary relationship is between the employer and the contractor. The employer is responsible for payment of the price and for site provision, while the contractor is responsible for all activities necessary to construct the project and comply with deadlines.

However, other relationships may arise, such as (i) between the contractor and subcontractors, and (ii) between the employer, contractor and third-party financiers, depending on project size and complexity.

Subcontractors have no direct relationship with the employer; their liability lies with the contractor. Similarly, the contractor is liable to the employer for subcontractor actions. Some contracts allow the employer to assume the contractor's position in subcontracts, particularly upon main contract termination.

In the case of public works, the responsibility for the site is mandatory for the employer. The Public Procurement Code stipulates that the employer must provide the contractor with the results of any geotechnical or geological tests, even in design-build projects.

In the case of private works, there are no mandatory provisions on this matter, so the responsibilities can be freely distributed between the parties.

Considering that the site is handed over by the employer to the contractor, it is generally accepted that the employer is responsible for its suitability for carrying out the works, as regards non-visible conditions (such as pollution, underground obstacles, geotechnical conditions, archaeological finds). Visible conditions, including access, are normally the responsibility of the contractor.

However, given the importance of the site conditions for the complete and timely execution of the works, for large projects, tests are usually carried out prior to the signature of the construction contract (or prior to delivery), such as geotechnical, geological and environmental tests, which are annexed to the contract.

Nevertheless, construction contracts in Portugal may transfer responsibility for site conditions to the contractor in order to avoid claims for adjustment of price and/or time as a result of unforeseen effects of site conditions. This is usually done by inserting a representation and warranty stating that the contractor is aware of the conditions of the site (including the subsoil) and has carried out all the tests it considers necessary for this purpose.

It should be noted that environmental concerns have recently (in March 2024) led to an amendment to Decree-Law 102-D/2020 of 29 December (General Waste Management Regime), which makes the provisional acceptance of any construction work subject to the prior (i) cleaning of the site, (ii) proper management and disposal of residues, and (iii) assessment of soil contamination if there is any indication of its existence.

Decree-Law 10/2024, of 8 January simplified the construction licensing process in Portugal by reducing bureaucracy and obstacles. Key changes include:

• expanding the list of projects exempt from licensing;
• reducing instances where licensing is required, needing only prior communication;
• implementing a “tacit acceptance” regime, where lack of municipal response validates the request;
• replacing the use permit with fee payments.

The current procedures for licensing construction projects are characterised by:

Licensing Procedure

The applicant is required to submit the architectural and technical projects to the municipality for review.

The municipality has between 120 and 200 days (depending on the gross construction area of the project) to decide on the application, under penalty of tacit validation.

Projects subject to licensing include, among others:

• the construction, alteration or extension works in areas not covered by a detailed plan or an allotment operation;
• works in listed buildings;
• reconstruction work resulting in an increase in the façade.

Prior Communication Procedure

Following the abovementioned recent change in law, the prior communication procedure is now the standard procedure in Portugal.

It involves the delivery of the plans/design to the municipality, who has 15 working days to request additional information on the plans/design. If it fails to do so, the prior notification is deemed to have been approved, subject to payment of the relevant fees.

The same applies for public works, although an expanded list of cases of licensing exemption exists for those works.

The obligation to handle the licensing of the construction works may be assigned to any of the parties in the construction contract but often lies with the employer.

Typically, from site handover to provisional acceptance, the contractor manages work protection and site maintenance, with these responsibilities shifting to the employer afterward. Especially in energy projects, an operation and maintenance agreement is typically signed between the employer and contractor, where the contractor, now the operator, maintains the project post-acceptance.

Apart from design, licensing, construction, testing and operation and maintenance, as well as financing, it is not common for the employer to instruct other functions to the contractor or any third parties.

The completion tests are normally requested by the contractor when they consider that the works are complete and ready for such tests. Provisional acceptance of the works is typically subject to the successful completion of the tests specified in the contract and inspection of all the works.

In pure construction projects, the tests are usually limited to the installed equipment (without prejudice to the employer’s inspection and/or supervision of all the works), whereas in projects such as energy projects, the tests are much more comprehensive and include validation of compliance with the agreed performance ratios through detailed test procedures set out in the contract.

Acceptance of private works is usually set out in the contract and is usually divided into (i) provisional acceptance, which takes place when the works have been completed and inspected and validated by the employer, and (ii) final acceptances, which take place when each warranty period has expired and an inspection by the employer has revealed no defects.

It is common for the construction contract to specify specific conditions for provisional and final acceptance. These include, but are not limited to:

For provisional acceptance:

• the works have been fully completed (and in operation, when applicable);
• all tests required by law, the contract or the supplier’s specifications have been carried out and passed;
• bank guarantees (if required by the contract) have been provided;
• as-built drawings have been delivered; and
• any liquidated damages due have been paid or set off.

For final acceptance:

• any defects identified during the warranty periods have been rectified; and
• any liquidated damages due have been paid or set off.

The transfer of risk in respect of the works from the contractor to the employer shall take place on provisional acceptance.

For the construction of buildings intended for long-term use, the Portuguese Civil Code establishes a period of five years during which the contractor remains liable for any damage caused to the employer or future purchasers in the event of collapse or defects in the works.

For construction contracts subject to consumer legislation (if the employer is a non-professional) or to the public procurement code (public works) the law provides for the following warranty periods against defects:

• three years for equipment assigned to, but independent of, the works;
• five years for non-structural works and technical installations; and
• ten years for structural elements.

These periods run from the date of delivery of the works to the employer.

However, private construction contracts, even if outside the scope of the consumer legislation, often provide for warranty periods similar to the ones applicable to public works.

During those periods, the employer must comply with certain rules and deadlines regarding the notification of defects and the bringing of claims before the courts, under penalty of forfeiture of the corresponding right, since the Civil Code imposes strict limitation periods for the exercise of the right to remedy defects.

Prior to the commencement of the warranty periods, at the time of the employer’s acceptance of the works, the employer shall have the right to inspect the works and (shall be obliged to) identify any defects which are either obvious or, although not apparent, have been identified by the employer.

If the existence of such defects is not notified to the contractor prior to acceptance, the contractor’s responsibility to remedy them shall cease. Obvious defects shall be deemed to be known to the contracting authority even if no inspection has been carried out prior to acceptance of the Works.

After acceptance of the works, during the warranty periods, the contractor shall be liable for any defects, provided that the employer complies with the statutory maximum periods for reporting defects to the contractor.

Contract prices in Portuguese construction contracts can be determined using several different methods.

The most common is the global, fixed and non-revisable price which, by its nature, includes all the works and associated costs required to complete the awarded works.

Particularly in cases where the quantities of work required to complete a project are not known (or cannot be known in advance for technical reasons), it is possible to determine the contract price by multiplying the quantities of work performed by the agreed unit prices (series of prices). In this case, it is common to establish an “estimated maximum price” which, if exceeded (or expected to be exceeded), gives the contracting authority the right to take any measures it deems appropriate to reduce the cost of the project, such as seeking alternative, less costly technical solutions.

In addition, the contract price may also be determined by an open book system, whereby all or part of the work awarded is subcontracted by the main contractor (usually to subcontractors selected by the employer) for an open book fee. In return for this fee, the main contractor assumes full responsibility for the work carried out by the subcontractors. In some cases, after definition of the price through and open book system, the price determined become a global and fixed price (lump sum).

Finally, the contract price may be paid in either monthly instalments or milestones, the latter being more common in projects where the investment in equipment is more significant, such as energy projects.

Historically, the risk of price fluctuations in private construction contracts has been borne by the contractor, particularly where the contract price is defined as a global, fixed and non-revisable amount. This is possible because price revision is not mandatory in private works. Public construction contracts, on the other hand, are subject to mandatory price revision.

However, in recent years (especially after the pandemic and the war in Ukraine), contractors have started to demand the inclusion of price revision clauses in private construction contracts, as the prices of materials and equipment were (and still are in 2024) subject to strong fluctuations.

The risk is usually spread by indexing the agreed unit prices to formulae which ensure that fluctuations above a certain percentage (usually 2%) result in a revision of these unit prices.

The revision may result in either an increase or a decrease in unit prices, depending on the direction of the verified variation.

Although the law allows for different methods of price revision for public works, the same is usually done through formulas provided by law for different types of works and includes the revision of the total amount of the contract price according to indexes that are regularly published.

It is becoming increasingly common for private construction contracts to refer to such formulas.       

Construction contracts usually specify several consequences for late or non-payment of invoices, including:

• charging interest for each day of delay;
• granting the contractor a right of suspension until payment is made;
• allowing the contractor to withhold work until payment is made; and
• entitling the contractor to terminate the contract.

Advance and delayed payments are common in construction contracts.

Advance payments are provided for when relevant investments by the contractor are required immediately at the start of the works, such as acquisition of necessary materials and/or equipment or in other to secure the price of the same. In private work contracts, usually a bank guarantee on first demand is demanded to secure the performance of the works, until the advance payment value is repaid. In public works it is mandatory by law.

Deferred payments may be agreed in cases where the works have been carried out by the contractor, but validation of their correctness/functionality/performance is only possible after testing, which may take place later in the execution of the project. In this case, it is common to stipulate that part of the price attributable to such work is payable only after its correctness has been validated by testing.

Interim payments are less common. However, they may be agreed during the execution of the work if the parties consider them necessary for the proper and timely completion of the project.

Interest rates are subject to periodic government decision and publication and are different when it is a private work contracts or a public construction contract. Currently, the interest rates are:

• for private contracts: 11.5% or 12.5%, according to Notice no. 1850/2024;
• for public contracts: 8.876%, according to Notice no. 678/2024.

In public works, the electronic invoicing is mandatory, and each invoice must include some information identified in article 299-B of the Public Procurement Code (eg, reference to the contract, payment instructions and billing period). In Portugal, electronic invoicing is therefore compulsory for all public organisations, according to Decree-Law 111-B/2017.

In private construction contracts, such obligation does not exist. However, it is common for the parties to adopt a procedure similar to the one described above, issuing invoices through electronic means.

The timeline of the performance of works under a construction contract usually consists of global and partial deadlines agreed between the employer and the contractor. These deadlines are reflected in a works programme, which is attached to the construction contract.

During performance of the works, the contractor is obliged to comply with those deadlines, under penalty of application of delay liquidated damages or penalties, and/or compensation of damages incurred, and/or even termination of the contract (subject to the specific stipulations of the contract on the matter).

The works programme is then complemented by the presentation, by the contractor, of successive updates showing the real progress of the works and its correspondence (or not) with the agreed deadlines.

With the assistance of supervision (which typically is designated and in some cases is mandatory), the employer is entitled to receive the information required to assess the progress of the works.

Whenever the agreed method of payment of the contract price is “payment by achievement of milestones”, the performance of the works and the achievement of each milestone is validated through inspection and subsequent issuance of a milestone completion certificate by the employer, entitling the contractor to payment of the part of the contract price linked with the completed milestone.

In cases of “payment by monthly measurements of work done”, the same procedure applies, with supervision validating the report prepared by the contractor regarding work done in the relevant month, and subsequent issuance by the contractor of an invoice for the approved work.

The occurrence of delays in the performance of obligations under a construction contract has specific legal and contractual consequences, depending on the party responsible for the delay.

Where the Contractor is responsible for the delay:

• application of liquidated damages or penalties;
• compensation for damages (it may be agreed that the compensation for damages is to be paid cumulatively with the liquidated damages or the penalties or in respect of damages exceeding the amount of liquidated damages or penalties; in public construction contracts it is understood that the compensation for damages is cumulative with the penalties);

• implementation of a work acceleration plan, if required by the contract; or
• termination of the contract.

When the employer is responsible:

• extension of time for the contractor to complete the work; or
• payment of additional costs incurred by the contractor, such as additional site costs.

There are no specific rules regulating concurrent delays, and it is not common for contracts to regulate this topic.

Construction contracts often provide for a claim procedure by the contractor, subject to time limits under penalty of forfeiture of the right. In the case of public works, the Public Procurement Code establishes a deadline of 30 days and specific requirements for the contractor to request the financial rebalancing of the contract.

In the event of delay by the contractor in the performance of the works, the employer shall generally be entitled to the remedies identified in 5.2 Delays above.

In the case of public contracts, delays in the execution of the works are subject to statutory penalties, which may vary between 1% and 2%, with a statutory cap of 20%. If this ceiling is exceeded, the employer may terminate the contract or, if there is an overriding public interest, the employer may not terminate the contract but increase the ceiling to 30%. Partial deadlines are also subject to penalties, at a rate of half that of the final deadline, and can be cancelled if the final deadline is recovered and met. These penalties are not considered to be liquidated damages, but are of a compulsory nature, so the employer can also claim and demand damages.

Requests for extension of time are formally submitted to the employer, describing:

• the reason for the delay;
• evidence that the delay is not attributable to the contractor.

The extension of time shall be determined by analysing (i) whether the described delay has affected the performance of the works and the critical path, and (ii) whether the cause of the delay is within the contractor's risk or not.

An extension of time is generally allowed for delays caused by force majeure, by the contracting authority, or by acts or omissions of third parties for which the contractor is not responsible (the specific definition of the content of the contractor’s sphere of risk will generally result from the provisions of the contract, or the lack thereof).

The same principles apply to public contracts.

The law provides for the situations in which the contractor is entitled to an extension of time:

• variation works;
• suspension of the works (causes not attributable to the contractor).

A claim for extension of time can be upheld by the contactor on unforeseen constraints or difficulties caused by the employer.

Portuguese law does not contain a concept of force majeure as it is commonly defined in construction contracts. However, it does provide for the right to terminate or modify contracts that are subject to abnormal changes in circumstances (Article 437 of the Portuguese Civil Code).

Given that the conditions for invoking Article 437 are very strict and depend on the verification of an event of such gravity that the demand for the fulfilment of each party’s obligations seriously affects the principles of good faith, it is common for the parties to agree on a definition of force majeure, granting the aggrieved party the right not to fulfil its contractual obligations affected by the event of force majeure.

Typically, the contractual definition of a force majeure event includes only those events that (i) were beyond the reasonable control of the party claiming the force majeure event, and (ii) were not reasonably foreseeable and, if foreseeable, were unavoidable or could not reasonably be prevented or overcome.

It is also typical to include examples of events which may constitute force majeure provided they meet the above criteria. For example: war, sabotage, hurricanes, earthquakes, lightning, pandemics, etc.

If a force majeure event impacts a party’s obligations under a construction contract, the affected party is typically entitled to a time extension for the duration of the event. If the event lasts beyond a specified period (usually around 90 to 180 days), either party may terminate the contract. Unless otherwise agreed, typically if an event of force majeure occurs each party bears its own costs.

Unforeseen circumstances are not governed by any applicable law. They are allocated between the parties according to what is agreed in the construction contract.

However, it is not uncommon for the employer to contractually transfer responsibility for errors and/or omissions in the design and for the consequences of unexpected site conditions to the contractor, making the contractor responsible for additional work required as a result of errors and/or omissions and/or as a result of site conditions not being as expected.

In the case of public contracts, unforeseen circumstances are regulated by law. In the case of errors and omissions in the design and for the consequences of unexpected site conditions, the contractor must identify the error or omission and the unexpected site conditions and has a deadline for submitting the claim for variation.

If the unforeseen circumstances are caused by the employer, the contractor is entitled to claim financial compensation for the financial repositioning of the contract. 

Portuguese law recognises disruption as a valid ground for extension of time and/or compensation, provided that the contractor proves that the disruption was caused by the employer’s breach of its contractual or legal obligations.

If the disruption is not attributable to the parties, it may fall within the scope of Article 437 of the Portuguese Civil Code, which deals with “abnormal change of circumstances”. If there is an abnormal change in the circumstances under which the parties entered into the construction contract, the affected party may, in certain circumstances, have the right to terminate the contract or seek modifications based on principles of fairness.

In public contracts, in the event of disruption caused by the employer, the contractor is entitled to claim financial compensation to restore the financial balance of the contract, or an extension of time, or both.

In public contracts, “abnormal change of circumstances” is regulated by law, based on the same principles but with different limitations and grounds. It may be considered for a change in the works, but the scope of the contract shall not be affected.

If the abnormal and unforeseeable change in circumstances is due to a decision taken by the contracting authority outside the exercise of its powers to perform the contract and which has a specific impact on the contractual situation of the contractor, or if the contract is modified for reasons of public interest, the contractor shall be entitled to have the financial balance of the contract restored. 

Other cases of abnormal and unforeseeable changes in circumstances shall only give rise to the right to modify the contract or to financial compensation, according to criteria of fairness/equity. 

Articles 809 and 800/2 of the Portuguese Civil Code (applied together) allow for contractual exclusions or limitations of liability, provided that such exclusion or limitation does not apply to acts constituting a breach of duties imposed by public order rules.

Consequently, liability arising from acts/omissions committed with gross negligence or intent, or which result in injury or death, for example, cannot be covered by a contractual exclusion/limitation of liability.

Portuguese law recognises the concepts of wilful misconduct (dolo) and gross negligence (negligência grosseira).

The main consequence of defining certain conduct as intentional or grossly negligent is the prohibition of the application of limitation clauses, even if there is an agreement between the parties to that effect.

It is possible for the parties to agree on limitations of liability, provided that such exclusion or limitation does not apply to acts constituting a breach of obligations imposed by rules of public order.

Depending on the nature of the project, limitations of liability may be agreed. In these cases, the liability is typically limited to a percentage of the contract price and might exclude type of damages such as consequential and indirect damages or even loss of profit.

Although limitations of liability, where they exist, are usually reciprocal, it is the limitation of the contractor’s liability that is most controversial, as in construction contracts the contractor’s conduct is more likely to cause damage than that of the employer, who is often only responsible for handing over the site and paying the price.

In public construction contracts, the amount of penalties payable under the contract is limited by law to 20% of the contract price and 30% of the contract price if the employer decides not to terminate the contract.

Indemnities are used in construction contracts to limit risk.

Generally, they cover the following risks:

• bodily injury, sickness, disease or death of any person during or by reason of the performance of the works;
• damage to or loss of property;
• infringement of intellectual property rights; and
• violation of legal standards.

The obligations and risks associated with a construction contract are usually covered by guarantees, such as bank guarantees, price retentions, insurance bonds or parent company guarantees.

Although contractors are increasingly requesting that bank guarantees or price retentions be replaced by insurance bonds, bank guarantees and price retentions remain the preferred method of insuring the employer against the risk of contractor default. Insurance bonds are generally considered less protective because they are subject to the terms and conditions of the insurance policy, whereas bank guarantees depend solely on the wording of the guarantee.

Bank guarantees and price retentions are usually used for security purposes:

• advance payments made by the employer to the contractor;
• the performance of the contractor's obligations under the construction contract;
• the achievement of performance ratios, when applicable; and
• the rectification of defects during the warranty period.

The bank guarantees provided for under the construction contracts are often of an (i) autonomous, (ii) on first demand, (iii) irrevocable and (iv) unconditional nature.

Only if the guarantor has clear documentary evidence that the execution of the bank guarantee is fraudulent or abusive can it refuse payment (mere doubt does not allow it to refuse), which provides certainty to the market.

On the employer’s side, although not very common, in certain cases (mostly capital-intensive projects) a parent company guarantee or even a letter of credit might be required from the employer to assure the contractor that the employer has the financial capacity to pay the contract price.

In Portuguese construction contracts, there are several types of insurances that are usually required of contractors.

The most important is the Contractor’s All Risk (CAR), which is a comprehensive insurance policy covering most of the risks associated with the execution of the works and the construction site. Due to the considerable cost of this insurance, it is usually only taken out for work of a significant value.

In addition, there are some insurances required by the law itself, such as (i) civil liability insurance, which covers the acts and omissions of the contractor and his personnel, (ii) motor vehicle insurance, and (iii) workers’ compensation insurance.

In some cases, employers will require that the CAR and civil liability insurance policies to be taken out by the contractor contain cross-liability clauses and/or include the employer as a co-insured party.

It is common for construction contracts to provide for the right of either party to terminate the contract in the event of the insolvency of the other party.

However, the validity of this type of provision has been much debated in Portugal (as in other European jurisdictions), due to the fact that it conflicts with the principles and objectives of insolvency law (which include the possibility of reorganising the company subject to insolvency proceedings).

Considering the impact of such clauses on the recoverability of a company subject to insolvency proceedings, the latest amendment to the Portuguese Insolvency and Corporate Recovery Code (CIRE) prohibits this type of clause from 2022, rendering all such clauses null and void.

Historically, risk-sharing procedures have been uncommon in Portuguese construction contracts. Typically, fixed and global prices are used, placing most of the risks on the contractor, who has the greater opportunity and ability to manage many of the relevant risks. However, collaborative contractual models, with risk sharing procedures, are starting to be more common in the Portuguese constructions sector.

Typically the employer bears financial and licensing risks, while the contractor handles risks like procurement delays or price increases (in absence of a revision clause).

Construction contracts usually specify several obligations of the contractor regarding its own personnel and that of its subcontractors.

In particular, the contractor is typically responsible for ensuring that its personnel (and those of its subcontractors):

• comply with the health and safety plan and, in general, with all applicable safety regulations;
• are legally employed;
• are duly and punctually paid for their work and that the Supplier complies with its tax and social security obligations in respect of such personnel; and
• have the technical and physical capabilities necessary to carry out the work assigned to them.

In Portugal, it is generally accepted that (except in very exceptional cases) subcontracting is permitted in private works, even if this possibility is not expressly provided for in the construction contract.

However, it is standard practice to expressly regulate the right and limitations of subcontracting in the construction contract.

As such, this right is often granted with some exceptions. For example, (i) subcontracting (or subcontracting above a certain amount of the price) may be subject to the employer’s consent, (ii) subcontracting above certain levels (the contractor representing level zero) may be prohibited, and (iii) it is common to prohibit subcontracting of all the works and limit it to a percentage of the works.

In the case of a public construction contract, subcontracting is expressly permitted by the Public Procurement Code, unless otherwise specified in the contract, but with a limit of 75% of the total works, subject to a formal form contract with the minimum information required by law and, in certain circumstances, prior authorisation by the employer.

In Portugal, background intellectual property rights are the property of their author.

However, in the case of works for hire, such as in contracts where the design is carried out by the designer/contractor, the economic rights to the intellectual property of the elements (design) specifically prepared for the project may be (and often are) initially attributed to the employer or are subject to the grant of a licence for use and reproduction in favour of the employer.

Moral rights must remain with the author and cannot be transferred.

According to Portuguese civil liability principles, a breach by one party gives rise to an obligation to compensate the other party (for damage and loss of profit), provided that the legal criteria for contractual civil liability are met: (i) existence of a contractual relationship, (ii) breach of a contractual obligation, (iii) fault (which is presumed), (iv) damage, and (v) a causal link between the breach and the damage.

Satisfaction of the causal link requirement between the breach and the loss is measured by determining whether or not the loss would have occurred in the absence of the breach. If the damage would have occurred even in the absence of the breach, there is no causal link.

The non-defaulting party might also be entitled to the termination of the contract with fair cause. Termination of the contract might be subject to a remedy period. 

This applies to all contracts, including those between employer and contractor or employer and designer.

In the case of public contracts, the contractor shall be entitled to terminate the contract in accordance with the Public Procurement Code in the following cases:

• abnormal and unforeseeable change of circumstances;
• definitive breach of contract due to an event attributable to the employer;
• delay in payment of invoices by the employer, if it exceeds six months or if the amount owed exceeds 25% of the contract price, excluding interest;
• unlawful use of the employer's powers to adjust the contractual relationship, if this renders the public party’s demand for the maintenance of the contract contrary to good faith;
• failure on the part of the contracting authority to comply with court decisions relating to the contract.

With the exception of the termination referred to in the third point above, termination for other reasons can only be carried out through the courts.

Termination of the agreement under the aforementioned conditions shall entitle the contractor to compensation for all damages and losses arising from the termination, in accordance with the general provisions of the law.

On the employer side, contract may be terminated as a penalty in the following cases:

• definitive breach of the contract attributable to the co-contractor;
• failure to comply with orders, directives or instructions issued by the contracting authority in the exercise of its management powers;
• repeated objections to the exercise of the contracting authority’s supervisory powers;
• assignment of the contractual position or subcontracting carried out in breach of the legal and contractual terms and limits, provided that maintaining the contracting authority’s obligations is contrary to the principle of good faith;
• if the aggregate value of penalties exceeds 20% of the contractual price;
• failure to comply with judicial or arbitration decisions pertaining to the contract;
• the co-contractor becomes insolvent or is declared insolvent by the court.

Additionally, contract may be terminated for reasons of public interest, but employer must duly substantiate that situation and it implies the payment by the employer of a compensation for damages and loss of profits (from which the benefits resulting from the anticipation of the expected gains are to be deducted).

Termination on the grounds of an abnormal and unforeseeable change of circumstances, caused by a decision taken by the employer outside the scope of its powers within the performance of the contract, entitles the contractor to compensation, which shall be similar to that provided for termination for reasons of public interest.

The execution of a public contract may be suspended in two cases, provided that the event causing the suspension is not attributable to the contractor:

• the temporary impossibility of fulfilling the contract, namely due to the delay on the part of the public contractor in supplying or making available the means or goods necessary for its execution; or
• the exception of non-performance – the typical example of which is non-payment.

Construction contracts in Portugal sometimes limit the remedies available to the parties in the event of breach.

Without prejudice to other mechanisms, this is usually done by:

• quantitative limitation of liability under the contract to a certain percentage of the contract price;
• qualitative limitation of liability under the contract, excluding certain types of damages (such as indirect or consequential damages);
• limitation of the amount of liquidated damages or penalties applicable to the contractor (as a percentage of the price); and/or
• limiting the circumstances in which the contractor may suspend the works or terminate the contract.

Sole remedy clauses are not common in Portuguese construction contracts. However, and although the issue of their admissibility is debated, part of the doctrine recognises that they are not prohibited, provided that, upon a case-by-case analysis, it is confirmed that the specific sole remedy clause does not conflict with imperative legal norms.

As briefly mentioned in 9.2 Restricting Remedies, it is possible for the parties to exclude or limit liability in construction contracts in Portugal.

This is more likely to be seen in relation to (i) damage caused by delay, where the parties sometimes limit compensation to the amount of the applicable liquidated damages/penalties, excluding compensation for the damage ultimately suffered by the employer, or limiting them to the excess damages (ii) indirect damage and loss of profit.

However, these exclusions are more common in major construction projects. In other cases, the parties usually simply refer to the applicable law (described in 9.1 Remedies).

The contractor’s right of retention is expressly recognised by the Portuguese Civil Code. It entitles the contractor to physically retain the works and the site as security in the event of non-payment of the contract price or of any compensation due in connection with the execution of the works, thereby preventing the employer from using the works.

Although construction contracts often provide for the contractor to waive such a right, the validity of clauses which completely exclude the right of retention in all circumstances is disputed.

On the other hand, the suspension rights of the contractor are generally limited in construction contracts, with a clear definition of closed lists that identify specific cases in which the performance of the works may be suspended by the contractor.

However, this contractual restriction does not remove the legal right of the contractor and the employer to invoke the “exception of non-performance” if there is a reciprocal relationship between the obligation breached by one party and the obligation to be performed by the other. If this is the case, the non-breaching party may refuse to perform until the breaching party resumes performance.

Termination of a contract is permitted if it is based on the law or an agreement between the parties.

In addition to any contractual grounds for termination that the parties may have agreed, a contract may be lawfully terminated in any of the following circumstances (references to articles are to articles of the Civil Code):

• impossibility of performance through no fault of the liable party (Articles 790 and 1227);
• impossibility of performance due to the fault of the liable party (Article 801 – in this case, only the non-breaching party may terminate the contract);
• abnormal change of circumstances (Article 437);
• either party expressly declares or indicates by its conduct that it will not perform its material obligations before the end of the performance period;
• either party is in default in the performance of its material obligations and fails to perform them within a reasonable time after being requested to do so by prior notice expressly stating that failure to perform them within that time will result in termination (Article 808);
• the non-breaching party objectively loses interest in the performance of the contract as a result of the delay (Article 808);
• withdrawal of the works by the employer (Article 1229).

In the specific case of the employer’s withdrawal from the contract, the contractor is entitled to compensation for all the work carried out and the expenses incurred, as well as for the profit he could have made by carrying out all the work

In other cases of termination, the party in breach is generally liable for damages (including costs and loss of profit) incurred by the party not in breach, provided that the conditions described in 9.1 Remedies are met.

Concerning public contract works, please consider what is mentioned in 9.1 Remedies.

Depending on whether the construction contract is of a public or private nature, the competent courts are, respectively, according to Portuguese law, the civil courts and the administrative courts.

However, it is common for the parties to a construction contract to recognise the jurisdiction of arbitral courts, given (i) the considerable structural delays in the civil and administrative courts, and (ii) the fact that the complexity of construction contracts makes it advisable to confer jurisdiction on institutions with relevant experience in the matter.

Concerning public contracts, the law allows public employers to choose arbitration, but with some formal restrictions, such as that the choice must be made at the time of the decision to award the contract, with publication in the procurement procedure and acceptance by the contractor, and must refer to the rules of an institutionalised arbitration centre. In the case of disputes with a value of more than EUR500,000, the law provides for an appeal against the decision of the arbitration court to the competent administrative court.

In Portuguese construction contracts, it is common to stipulate that arbitration tribunals are the competent tribunals to settle disputes.

In addition to this provision, it is common to establish a mechanism for expert determination to resolve disputes of purely technical nature, often without excluding recourse to arbitration. However, contracts typically don't mandate mediation as a compulsory step before arbitration in case of dispute.