In Denmark, there are no laws specifically governing the contractual relationship between an employer and a contractor. Instead, there are several standard contracts which have the status of agreed documents and which virtually all larger construction contracts are based on, see 1.2 Standard Contracts.
With regard to statutory requirements related to buildings and constructions, this is mainly governed in the Danish Building Act and the appertaining ministerial orders.
Furthermore, there is the Danish Contracts Act which regulates, inter alia, when and how a contract is agreed and binding. It also contains certain principles of interpretation.
As mentioned in 1.1 Governing Law, larger construction contracts are usually based on a suite of standard contracts governing the relationship between the employer-contractor, employer-designer, contractor-subcontractor and contractor-designer. However, the use of standard contracts is not mandatory.
Construction contracts in Denmark are rarely based on FIDIC, NEC3 or the like, due to the availability of the aforementioned standard documents, which are somewhat comparable to the standard documents used in other parts of Scandinavia (Sweden and Norway).
The AB Standards
The Danish standard documents are agreed documents, meaning that they have been prepared based on, inter alia, negotiations between opposing interest groups. A committee appointed by the Danish Minister for Climate, Energy and Building (and containing representatives from the interest groups) has formulated three standard contracts (the “AB Standards”) for use in construction in Denmark.
The AB Standards set out the parties’ contractual rights, obligations and responsibilities and are used alongside the parties’ construction contract, which is often brief.
Though the AB Standards are, to some extent, a codification of generally applicable Danish legal principles, the AB Standards only apply if the parties have agreed thereto.
The COVID-19 pandemic has, not surprisingly, affected the Danish economy negatively. During 2020, the Danish GNP went down by approximately 2.7%.
However, the total activity and investment within the Danish building and construction sector has – after an initial dip in April 2020 – gradually and consistently increased during 2020, and this progress is expected to continue during 2021.
Restrictions and Protective Measures
Nonetheless, the COVID-19 pandemic has of course entailed certain restrictions and protective measures for those working within the industry, affecting how work is performed.
As part of the general obligations under the Danish Working Environment Act, for example, the employer (as defined from an employment law perspective) has an obligation to ensure that work is planned, organised and carried out in a way that ensures health and safety. These obligations must be viewed in light of and take into account that the spread of COVID-19 must be prevented.
Furthermore, the employer must provide employees with thorough instructions of specific preventative actions to be taken to prevent the spread of COVID-19 on the construction site. Employers are currently also obliged to test non-resident employees for COVID-19 after entry into Denmark.
Similarly, the Danish Health Authority has also issued a guideline regarding employers who provide housing for non-resident workers, which must be followed to prevent the spread of COVID-19.
These restrictions – and several more – have of course burdened those working within the sector, but the construction market in Denmark is, under the circumstances, doing well.
In Denmark, the entities acting as employers in construction projects vary greatly. Common entities are the Danish state, regional authorities and municipalities, as well as co-operative housing societies. Similarly, the private sector plays a large role, and is responsible for around two thirds of the total investments.
Under a construction contract, the rights and obligations of the employer depend, of course, on the specific contract entered. However, generally, during the contract conclusion period, the employer:
During the construction phase, the employer has a number of management and control obligations and rights towards the contractor as detailed in the AB Standards.
Companies that typically act as contractors may be divided into larger construction groups, specialising in design-and-build contracts, and specialised contractors who focus on certain fields of construction and therefore often act as subcontractors to design-and-build contractors.
Generally speaking, the contractor is responsible for the planning and execution of the works and has, unless otherwise agreed, freedom of choice as to how the works are to be performed. Besides performing the works, a contractor must usually provide security for fulfilment of its duties towards the employer, take out liability insurance, deliver materials, prepare and update working schedules, etc.
Subcontractors are typically companies with specialist knowledge in a specific area; typical examples are the so-called technical (sub)contractors, specialising in areas such as ventilation, electricity, and plumbing and heating.
Contractually speaking, a design-and-build contractor is – vis-à-vis its subcontractors – considered an employer in Denmark. The general rights and obligations of the subcontractors are therefore comparable with the rights and obligations of the contractor towards the employer.
Construction projects in Denmark are most commonly financed by private banks, pension funds and public entities.
The financiers are not a party to the construction contract but have an independent contractual relationship with the relevant party. As such, the financiers have no direct rights or obligations under the construction contract, besides those following from guarantees issued by the financiers.
Any control or rights would therefore have to be agreed upon in the contract between the financier and the debtor. As an example, the financier may have an interest in novating the construction contract if the employer goes bankrupt. Such right to novate an agreement must generally be agreed upon in advance under the construction contract between the employer and the contractor.
Given the freedom of contract, the scope of work can be determined in any way the contractual parties agree to. Essentially, the scope of work is determined by the employer in the tender documents, either in the form of certain functional requirements to be achieved or in the form of a more detailed set of specifications, depending on the type of contract. Such scope of work is subject to agreement (potentially after negotiations) with the contractor(s).
When the contract is concluded, the scope of work is (in theory) set, and any additional work or changes thereto may entail that the contractor is entitled to additional payment and time.
Whereas the requirements regarding the work to be performed tend to be categorised as functional or performance requirements in design-and-build contracts (ABT 18), the requirements regarding the work tend to be more specified in other construction contracts (AB 18).
In accordance with the AB Standards, the employer has a right to order variations to the works when such variations are naturally linked to the services agreed upon.
An example of a variation could be that the contractor must supply a service in addition to, or instead of, the originally agreed service. However, a change in the nature, quality, type or execution of a service may also be considered a variation.
The employer’s right to order variations is not unlimited. As stated above, it is a requirement that the variation is naturally linked to the services agreed.
Rights of the Contractor
It is also worth noting that – to balance the contractor’s interest – the contractor has a right to carry out (and be paid for) variations demanded by the employer, unless the employer proves that there are special reasons for having another contractor perform the work. Such special reason may, inter alia, be that the contractor does not have the necessary technical knowledge to perform the variation or that the payment requested by the contractor is unreasonable. As such, the employer cannot simply engage a new contractor to perform work that is naturally linked to the works that the already-engaged contractor has performed on a project.
Determining the Price
With regards to determining the price of the variation, this depends on the specific AB Standard entered into, but pricing is commonly either done based on unit rates agreed in the contract or on an account basis. With regard to the latter, the contractor may claim what is reasonable, and it is up to the employer to prove that the claimed price is unreasonable.
The responsibilities regarding the design process between the employer, the designer, and the contractor depend on the parties’ agreement and may be construed with many nuances and hybrids. However, some general starting points can be discerned from the AB Standards.
AB 18 – Contractor Only Carries Out the Building and Construction Work
If AB 18 is agreed, the employer and the contractor have – as a starting point – agreed that the contractor “only” carries out the building and construction works, and that the employer is responsible for the design (drawings, descriptions, etc).
In such cases, the employer bears the full responsibility for the design, and the contractor is only to carry out design work if this has been agreed.
With an AB 18 set-up, the employer will usually enter a contract with a designer/consultant to carry out the designs on behalf of the employer – such contract is usually based on an ABR 18, see 1.2 Standard Contracts. The designer/consultant will then be responsible for the design in the contractual relationship between the employer and the designer/consultant.
ABT 18 – Contractor Carries Out the Building and Construction Work and Design (Design and Build)
The employer and contractor can agree that the contractor carries out the building and construction works and supplies the design. ABT 18 is relevant for this type of agreement, see 1.2 Standard Contracts.
In such cases, the contractor bears the full responsibility for the design in the relationship between the employer and the contractor. However, if the employer has proposed a specific type of design in the tender documents and the design is applied, then the contractor may not be responsible for this design.
The contractor will, in such instances, often enter a contract with a designer/consultant to carry out the design (based on ABR 18), and the designer/consultant is therefore responsible for these designs in the relationship between the contractor and the designer/consultant.
The division of responsibilities in the construction process between the employer and the contractor(s) depends on which AB Standard has been agreed, namely AB 18 or ABT 18.
To give an example, some of the employer’s and contractor’s main responsibilities during the construction process (after the design phase) in an AB 18 set-up may be described as the following.
The employer is responsible for:
The contractor(s) is responsible for the work performed, namely, that the work is performed in accordance with the contract (the design, possible requirements, etc) but also more generally that the work is done in accordance with good professional practice. If the work is not performed in accordance with the contract or good professional practice, that work is considered defective.
The contractor is, as a starting point, also responsible for preparing a work schedule (based on the master programme) which states the sequence of the individual elements of the contractor’s work, including assessing compliance with this schedule on an ongoing basis. The contractor is further responsible for quality assurance of its services.
The above-described division of responsibilities may, however, be amended as the parties see fit, and the possible division of work is therefore completely up to the parties concerned.
Information about Obstacles at the Construction Site
Regarding the status of the construction site, the tender document must include information about surveys and studies made concerning groundwater and soil conditions, pollution, pipes, cables, hazardous substances and materials, as well as any other obstacles. This follows from both AB 18 and ABT 18. Thus, the employer is responsible for inspecting the construction site, unless otherwise stated in the contract between the employer and the contractor.
If the contractor finds that the work cannot be performed in accordance with the contract due to obstacles, the contractor must notify the employer immediately and await instructions.
Public Enforcement Notices or Prohibitions
It is also worth noting that the authorities are entitled to issue public enforcement notices or prohibitions. This is the case if something at the construction site does not fulfil, for example, regulatory requirements for pollution, or if archaeological finds are discovered at the site. The employer bears the risk for such notices or prohibitions unless they have been issued as a result of the contractor’s actions.
Most construction projects require a building permit, which is issued by the local municipality upon the employer’s application, before the construction process begins. The permit is only given if the construction project is in accordance with Danish building regulations and the local development plan, if applicable.
Upon completion of the construction project, the employer must apply for an occupancy permit before using the new building. The occupancy permit is given by the municipality after receiving all the relevant documents, including a declaration stating that the construction work has been carried out in accordance with the building permit and the building regulations.
The building permit and the occupation permit are governed by mandatory law (Danish Building Act).
The contractor bears the risk of damage to, or loss of, works and materials until the work has been handed over to the employer – see 1.2 Standard Contracts, AB 18 and ABT 18.
The contractor is, therefore, also responsible for maintenance of the works during the construction. While the contractor obviously has an interest in taking care of the works during the construction, it is essentially up to the contractor how this obligation is fulfilled.
When the work has been handed over, the employer is responsible for damage to and loss of works and materials, as well as maintenance. During the construction process, the employer is also responsible for damage to or loss of works if the damage or loss is due to circumstances relating to the employer. If the work or part thereof is taken into use before the handover, the employer is also responsible for any loss or damage to the work occurring thereafter.
Other functions in the construction process such as operation, finance or transfer are usually not instructed by the employer to the contractor or third parties. Exceptions do occur, however – for example, in large infrastructure projects.
Before providing a few notes on the tests for completion of works in Denmark, it is important to note that the relevant time for evaluating whether a work is defective is the time of handover.
The quality of the works will therefore be assessed during the handover meeting, but actual tests are usually not part of the ordinary handover meeting.
This must be viewed in light of the fact that construction contracts often include provisions requiring the contractor to perform certain quality assurance of the works, including the design, as well as provisions on samples or tests to be taken prior to handover. The result of such tests will therefore be part of the contractor’s quality assurance documentation, submitted to the employer on an ongoing basis prior to handover.
As a new rule in the AB Standards (revised in 2018), the parties must – prior to the actual handover of the works – conduct a pre-handover review.
The purpose of conducting a pre-handover review is to support a continuous inspection for defects and to align the parties’ expectations.
Prior to handover of the works, the employer must summon the parties to attend a review of the works (all or sections thereof) in reasonable time before the agreed handover date. At the pre-handover review, the employer prepares a protocol stating all matters identified, and any remarks made by the contractor. If the identified matters are considered defects by the employer (and the contractor), the contractor will agree to rectify the identified defects. The fact that a matter has not been identified by the employer at the pre-handover review does not preclude the employer from later raising the matter as a defect.
The Actual Handover Meeting
Immediately before the completion of the works, the contractor must give the employer a notice of completion, after which the employer will summon the contractor for the actual handover meeting. Once the handover meeting has been held, the works are considered handed over to the employer, unless material defects are identified at the meeting. Material defects will particularly be matters preventing the employer’s use of the works to a significant extent.
At the handover meeting, the employer prepares a handover protocol in which the defects and other matters identified are stated. In addition, the parties agree on the methods and deadlines for the rectification of the defects. The handover protocol will state whether the works are considered handed over.
Defects Liability Period in Accordance with the AB Standards
Inspection of the works is made at the handover, one year after the handover and again, five years after the handover. The purpose of these inspections is to enable the parties to identify any defects together.
An absolute deadline to present claims regarding defects detected is also regulated in the AB Standards, ie, the employer’s claims must be submitted no later than five years after handover of the works, after which the contractor’s liability for defects generally ceases. Exceptions may be made where the contractor has given a guarantee, the quality assurance process has materially failed, or the contractor has acted in a manner that is grossly negligent.
Danish Statute of Limitations Act
In Denmark, it follows from the Danish Statute of Limitations Act that a claim becomes statute-barred three years after the claimant became or should have become aware of the circumstances giving rise to the claim. This applies in parallel with the rules in the AB Standards.
The limitation period may be suspended by, for example, mutual agreement, or by taking legal action to pursue the claim.
Acquiescence Resulting in the Forfeiture of Rights and Failure to Notify of Defects
Furthermore, according to Danish case law, the employer may lose an otherwise entitled claim in respect of defects against the contractor if the employer, for example, fails to notify the contractor within a reasonable period of time after the defects were or should have been discovered (even though the claim is presented within the five-year period). Likewise, the employer may lose its claim if the employer’s behaviour and conduct gives the contractor a reasonable expectation that the claim does not exist or has been forfeited. These principles apply in parallel to the AB Standards and the Danish Statute of Limitations Act.
In Denmark, the contract price can either be a fixed price, on account or a combination of these. The most common way of establishing the contract price is by using a fixed price. However, this will depend on the parties’ agreement.
In general, the contract price includes all services and materials necessary for the contractor’s completion of the scope of works. The contractor’s offer, including the price, is based on the employer’s tender provided to the contractor as a basis for the preparation of the offer. In this way, it is essentially up to the contractor to establish the contract price – assuming, of course, that the employer accepts the offer.
In relation to payments, the contractor is entitled to receive payment twice a month for any works performed and materials delivered to the construction site, in accordance with the AB Standards. However, the parties may instead agree that payment is to be made in accordance with a payment schedule, stipulating the dates or milestones at which a certain percentage of the contract sum falls due for payment, provided that the progress of the works at that time is as planned.
In cases of late or non-payment, the contractor has a number of options.
The contractor is entitled to claim interest in accordance with the agreement or, if nothing has been agreed, the Danish Interest Act.
The contractor is also entitled to stop the construction works if the employer without due cause refuses to pay the amount due by the final date for payment. To be entitled to stop the work, the contractor must first submit a written notice to the employer with a short deadline for payment. The condition thereafter is that the work will be resumed when the payment has been made by the employer. However, stopping the work may include a considerable risk, as the contractor may be liable for the employer’s losses if it turns out that the contractor was not entitled to the payment claimed, and on which basis the works were stopped.
Ultimately, the contractor may be entitled to terminate the construction contract if the employer fails to fulfil its key obligation, namely payment to the contractor. This depends, however, on the circumstances.
There are no mandatory means of invoicing in Denmark, as this depends on the agreement between the parties. Typically, the parties agree on certain procedures and requirements in respect of invoicing.
Often, the parties agree that the contractor must forward a “draft invoice” to the employer for approval before submitting the actual invoice (to avoid issuing credit notes, etc).
Generally, however, no specific rules on this apply – either by law or in the AB Standards.
In accordance with the AB Standards, the tender documents must include a master programme specifying, among other things, the start and end date of the work and interim deadlines, if any. See also 3.4 Construction.
When the construction contract is entered, the contractor must prepare a working/design schedule and execution schedule that meet the deadlines set out in the agreed master programme.
If it seems likely that the schedules will not be adhered to, they must be updated stating to what extent an extension of time is requested or accepted, and whether the delay concerns a deadline associated with liquidated damages.
Certain milestones are often included in the master programme, and it is not unusual that if such interim milestones are exceeded by the contractor, this will entitle the employer to claim liquidated damages. The liquidated damages must, however, be specifically agreed and the deadline must have been set to ensure the completion of an activity crucial to the construction process or other material issues.
In the event of delays, the party that becomes aware that there will be a delay, must notify the other party as soon as possible. Furthermore, the parties must endeavour to avoid or reduce delays by taking such measures as may reasonably be required.
Delays may entitle either the contractor or the employer, or both, to an extension of time (see also 5.4 Extension of Time). In such cases, the party concerned must notify the other party in writing of the required time extension and the reason for such extension, and the other party must respond to this.
If a contractor is delayed and not entitled to an extension of time, this constitutes an actionable wrong.
In the event of a delay where the contractor is not entitled to an extension of time, the employer is, as a starting point, entitled to claim its losses covered by the contractor.
However, most construction contracts contain an agreement on liquidated damages if the milestone date is exceeded, which is often agreed as a daily penalty fixed as pro mille of the contract sum (usually in the range of 0.5–2‰).
If liquidated damages have been agreed, the employer is not entitled to claim additional damages as a result of the delay in question – including where the employer’s loss exceeds the liquidated damages. In other words, the liquidated damages replace the employer’s right to claim its losses covered by the contractor in the event of the contractor’s delay. Conversely, the employer does not have to prove a loss if liquidated damages have been agreed.
As such, there are pros and cons to both types of sanctions (loss covered or liquidated damages).
If the agreement is deemed unreasonable, however, a Danish court or an arbitral tribunal can revise the agreed rate of liquidated damages.
In accordance with the AB Standards, the contractor is entitled to an extension of time if the execution of the works is delayed as a result of:
The contractor must, as soon as possible, notify the employer in writing of the required time extension and the reason for such extension.
In the AB Standards, the term "force majeure" covers exceptional external events beyond the control or responsibility of the parties. This would usually include war, riots, acts of terrorism and acts of God.
The term force majeure may differ in Danish construction law, depending on the situation. As such, force majeure is considered to have a wider scope when referring to the contractor’s entitlement to an extension of time compared to when considering the contractor’s risk related to damage to, or loss of, works and materials.
With regard to the contractor’s entitlement to claim extension of time, matters such as fire, strikes, lockouts, blockage and vandalism are usually considered force majeure.
In relation to the COVID-19 pandemic, this may be a force majeure circumstance in Denmark. However, this will depend on the specific circumstances.
Finally, it is not unusual for the term force majeure to be specifically defined in the construction contract, which may prevent subsequent disputes regarding the interpretation of this term.
Unforeseen circumstances may qualify as force majeure if the circumstances, as mentioned, are exceptional and beyond the control of the parties. However, if the unforeseen circumstances cannot be qualified as force majeure, the question arises as to who is liable for the unforeseen circumstances.
If unforeseen circumstances – despite the performance of preliminary studies as mentioned in 3.5 Site Access – lead to public enforcement notices or prohibitions that make it impossible or unreasonably burdensome for the employer to continue with the contract, the employer is entitled to cancel the contract with the contractor. In such case, the contractor is entitled to claim its losses covered by the employer (except lost profit related to non-completion of the remaining works).
Such scenarios are, luckily, rarely seen, and the most common result of unforeseen circumstances is that the contractor receives an extension of time and additional payment to overcome the unforeseen obstacles, etc.
As a general rule, liability may be limited by the agreement between the parties within construction contracts. In Danish construction contracts, this mainly finds expression in agreeing to a specific cap for which a party can be liable.
For instance, in ABR 18 (the employer/contractor–consultant standard agreement), the consultant’s maximum liability for damages is limited to twice the agreed consultancy fee, but no less than DKK2.5 million – provided that no project liability insurance has been taken out.
However, as an exception to the general rule of freedom of contract, it should be noted that an exclusion of liability may not apply if the party in question has acted with gross negligence or wilful misconduct or if the party has materially breached its core obligations.
Wilful misconduct and gross negligence are known legal concepts in Denmark – also in relation to a construction contract. Besides in relation to a limitation of liability as described in 6.1 Exclusion of Liability above, these terms are also relevant in relation to the AB Standards and, more generally, compensation.
As an example, even if the five-year absolute deadline for submission of a claim related to defects has been exceeded (as described in 3.11 Defects and Defects Liability Period), the employer’s claims for defects that are a result of the contractor acting with gross negligence or wilful misconduct, are not limited by this period.
Another example is the employer’s relationship to its contractor’s subcontractors. As a part of the AB Standards, the employer waives any claim for non-contractual damages against its contractor’s subcontractors in respect of matters covered by a direct claim for defects. This, however, does not apply if the direct claim for defects against the subcontractor has been caused by an intentional or grossly negligent act on the part of the subcontractor.
Furthermore, negligence is relevant for establishing a basis for liability in relation to compensation. However, in Denmark, ordinary negligence is sufficient to establish this basis of liability.
As described in 6.1 Exclusion of Liability, it is – as a clear starting point – possible to limit one’s liability.
In Danish construction contracts, this is usually done in the contracts between an employer/contractor and a consultant. Furthermore, a contractor’s liability may also be limited to a certain maximum amount.
Since the AB Standards divide the responsibilities and risks between the parties in a thorough and balanced way, specific indemnity clauses are generally not used to limit risk in relation to construction projects in Denmark.
In accordance with AB 18 and ABT 18, both the contractor and the employer must provide a performance bond as security for the performance of their obligations. This does not apply to the employer if the employer is a social housing organisation or a public employer.
A performance bond must, unless otherwise agreed, be in the form of an adequate bank guarantee, fidelity insurance or some other adequate type of security. Parent company guarantees do not meet this requirement, but it may be agreed between the parties that such a guarantee is sufficient.
Until handover has taken place, the contractor’s performance bond must correspond to 15% of the contract sum exclusive of VAT. After handover, the performance bond is reduced to 10%. The performance bond is further reduced from 10% to 2% one year after handover and ceases altogether five years after handover, unless the employer has submitted a prior written notice of defects. In such a case, the bond is reduced when the defects have been rectified.
The employer’s performance bond must correspond to three months’ average payments – but not less than 10% – of the contract sum exclusive of VAT. The performance bond will cease once the contractor has submitted the final account and has no outstanding claims.
Both the employer and the contractor can request payment under the performance bond. Such request must be made in writing and notified simultaneously to the other party and the guarantor, specifying the amount claimed. The amount claimed is payable to the contractor within ten working days after receipt of the notification unless the relevant other party has filed a request with the Danish Building and Construction Arbitration Board prior to this, asking the Board to issue a decision on the security provided under the performance bond, in particular, with a view to determining whether the payment claim is justified.
Some insurances are mandatory when entering a construction contract and carrying out construction work in Denmark. The insurances must be taken out by either the employer or the contractor.
Insurances Taken Out by the Employer
The employer is obliged to take out and pay for fire and storm insurance according to AB 18 and ABT 18.
Furthermore, the employer must take out building damage insurance if a building is mainly used for residency, see the Danish Building Act. This is unless the building is intended to be rented out.
As an optional insurance, the parties can agree on all-risk insurance, which is commonly agreed for large buildings or civil engineering work contracts.
Insurances Taken Out by the Contractor
The contractor is obliged to take out professional and product liability insurance. This is insurance that covers damages to employer’s or a third-party’s person or property. However, the insurance does not cover damages to objects where the damage is caused during performance of repairs, installing, mounting or, in other ways, reworks, and where the insured has accepted these works.
The provisions regarding bankruptcy and insolvency are similar in the various AB Standards and apply if a party is declared bankrupt, subject to reconstruction proceedings or if the party’s financial situation in general is such that it must be assumed that the party is unable to perform its obligations under the construction contract.
If one of these scenarios occurs (eg, bankruptcy), the other party is entitled to terminate the construction contract.
Prior to the actual termination, however, the party must give a written notification to the bankruptcy estate, and the estate must determine whether it wishes to become a party to the contract. This follows from the Danish Bankruptcy Act.
It is worth noting that the bankruptcy estate must give notice of this without undue delay, and the bankruptcy estate will seldom enter into a construction contract.
In the situation where a party is subject to reconstruction proceedings or, due to its financial situation, is assumed to be unable to perform the construction contract, that party may avoid a termination by immediately providing adequate security for the performance of the contract.
In Denmark, there is nothing to prevent the parties from agreeing to share a certain risk. However, such risk sharing is not a common practice in construction contracts.
In recent years, there has been an increase in so-called labour clauses. Such clauses usually oblige those working on a construction project to ensure that the workers employed receive wages, special allowances and enjoy working conditions that are no less favourable than those established for work of the same character under a collective agreement entered into by most representative organisations of workers and employers in Denmark in the industry concerned.
Such clauses are mandatory when one of the parties is a public entity, but these clauses are becoming more and more common for private entities as well.
In accordance with AB Standards, the contractor or consultant may subcontract the execution of the works or the design to subcontractors or subconsultants if it is customary or natural for the works/design to be executed by a subcontractor.
However, in larger construction contracts, it is often agreed that all or specified parts of the works are to be executed by the contractor or that the employer must pre-approve subcontractors.
Intellectual property is not regulated in the AB Standards. The general starting point according to which the creator has the intellectual property rights therefore still applies. However, the contractor and the employer have, of course, a right to use the design materials, descriptions, drawings, etc made, for example, by the consultant, provided that these are used in an ordinary and intended matter in connection with the construction project.
The employer’s right to use such documents (drawings, descriptions and other design material) also applies if the employer has rightfully terminated the contract, if the removal or lack of access to these documents would inflict a loss on the employer.
It is, however, occasionally seen that the parties agree on certain provisions regarding the intellectual property of the design material, etc, prepared in relation to a construction project.
The remedy available in the event of a breach of a construction contract depends on the specific circumstances, notably the severity of the breach and what the breach relates to.
With regards to termination, under Danish law a party is generally entitled to terminate a contract if there is a material breach, and such breach may express itself in many ways, just as it may be agreed beforehand in which situations a party may terminate the contract.
The AB Standards include specific provisions regarding the remedy available in different situations.
For instance, it follows from the AB Standards that an employer is entitled to demand that a subcontractor or supplier is deprived of its right to execute works and deliver materials to the construction project, if that party has failed materially to comply with applicable rules or agreed terms and conditions on social responsibility, including rules on health and safety at work. Thus, the employer has, in certain circumstances, a right to remove a subcontractor from the construction project even though the employer has no contractual relationship to that subcontractor.
Nonetheless, the most frequent scenarios are related to delay and defects, and a few notes on these situations are therefore inserted below.
The Employer’s Remedies in Relation to Delay and Defects
The most common remedy available for the employer in the case of a contractor’s delay is liquidated damages, as described in 5.3 Remedies in the Event of Delays.
Furthermore, the employer is entitled to terminate the construction contract in whole or in part with immediate effect in the event of material delay by the contractor.
With regard to defects, which are assessed at the time of handover, the employer is entitled to retain a reasonable amount as security for the rectification of defects notified at the time of handover. This amount is payable to the contractor as soon as possible after the defects have been rectified.
The contractor has both a duty and a right to rectify the defects identified at handover. However, if the contractor fails to rectify the defects within a reasonable time, then the employer is entitled to have the defects rectified at the contractor’s expense or to be granted a reduction in the contract sum.
During the project, the employer is further entitled to terminate the contract if the works are executed at such a low quality level that the employer has reasonable grounds to assume that the contractor will not be able to complete the works without material defects.
The Contractor’s Remedies in Relation to Delay
If the employer fails to pay an amount due by the final date for payment, various remedies are available for the contractor. See also 4.2 Payment.
The contractor may stop work if the employer fails to pay an amount due. Prior written notification with three working days’ notice must, however, be submitted to the employer.
The contractor is also entitled to terminate the construction contract in the event of material delay related to the employer or delays by another contractor, provided that the employer does not make reasonable efforts to expedite the works. Other material breaches by the employer may also entitle the contractor to terminate the contract.
Provisions containing restriction of remedies are not uncommon in Danish construction contracts, but most commonly the provisions on remedies in the AB Standards are used, though often with certain nuances.
Danish construction law is, however, not as strict in its literal interpretation as other jurisdictions, and parties sometimes attempt to formulate quite one-sided remedy provisions.
Significantly one-sided provisions can be challenged and are sometimes set aside by Danish arbitral tribunals.
Sole remedy clauses where certain types of remedy are strictly excluded, etc, are not common in construction contracts in Denmark.
As described in 5.3 Remedies in the Event of Delays, liquidated damages are often agreed and entail that the employer is not entitled to claim additional damages related to that delay. This may be considered a sole remedy clause to some extent, but besides such clauses, sole remedy clauses are generally not used. Part of the explanation for this is presumably due to the excluded damages in the AB Standards, see 9.4 Excluded Damages.
In the AB Standards, certain damages are excluded from liability.
Generally, the contractor is not liable for any loss of business, loss of profit or other indirect losses resulting from defects. In relation to the contractor’s product liability, the contractor is likewise not liable for any loss of business, loss of profit or other indirect losses resulting from damage caused by a defect in a product used in the building or construction works.
Furthermore, in relation to delay caused by the employer, the employer is not liable for lost profits as a result of the contractor being unable to carry out other work in the delay period and similar ensuing losses.
Under Danish law, a party has a general right to withhold or set off payment against the other party if one has a (counter) claim. Such rights may be amended in the construction contract but are most often not amended.
As such, withholding payment or setting off a claim is a common tool for employers if, for instance, the employer has a claim against the contractor as a result of a breach.
The public courts are generally competent to adjudicate disputes in Denmark, if nothing else is agreed between the parties.
Since the AB Standards includes an arbitration clause and since the AB Standards are used in most larger construction contracts, most construction disputes are subject to resolution under the auspices of the Danish Building and Construction Arbitration Board.
The Danish Building and Construction Arbitration Board presently handles approximately 400 arbitration cases and over 1,000 requests for expert opinions a year and is therefore highly capable and experienced.
As mentioned, arbitration is commonly used within construction disputes if the parties have based their contract on the AB Standards.
In addition to arbitration, the AB Standards include a range of alternative dispute resolution.
Dispute Resolution Ladder
The AB Standards contain a so-called dispute resolution ladder. This entails that efforts must be made to resolve and settle a dispute between the parties through negotiation, at either party’s request.
Mediation, conciliation, speedy resolution and arbitration may not be initiated before the negotiation procedure has been completed.
Mediation and Conciliation
Furthermore, at the request of either party, the Danish Building and Construction Arbitration Board will appoint a mediator with a view to settling a dispute. The parties have a duty to participate in the mediation/conciliation process, and no arbitral proceedings may be initiated or continued until the mediation/conciliation process has been completed.
In certain cases, the Danish Building and Construction Arbitration Board can appoint a so-called umpire to make a speedy resolution at the request of a party.
Not all disputes are suitable for speedy resolution. A few examples of disputes that are suitable for speedy resolution are:
High Activity in the Danish Construction Business, as Well as Increased International Interest and Possibilities
Activity in the Danish construction business as of 2021 is continuously high, and currently shows no signs of cooling off. COVID-19 has had a limited effect on large-scale construction projects, while medium-sized and smaller contractors have seen increased activity. Government initiatives have been introduced to incite consumers to spend money, and much of this money is spent on home improvements, house extensions, etc.
The Danish construction market has experienced an ever-increasing interest from international contractors, engineers and architects. The scale of recent and ongoing projects, such as the Metro Cityringen project in Copenhagen, the Odense Tramway, the Odense University Hospital, and the Copenhagen Metro “Branch off to Sydhavnen” has necessitated and attracted international experience and expertise. Similarly, the construction of a total of 16 so-called super hospitals spread throughout the country, of which six are greenfield projects while the remainder are extensions to existing hospital facilities, also constitute major, ongoing projects.
Several of the largest European construction companies have established local departments or branches to continuously operate in the Danish market. The tendency in major construction and civil works projects, such as those mentioned above, has been for international contractors to submit tenders based on joint ventures established for the specific construction project. This has been done with great success.
The projects above have all been won and executed by non-local joint ventures. The same applies to the Fehmarn Tunnel project – the construction of an 11-mile tunnel between Denmark and Germany, where a Dutch consortium heads the project on the Danish side of the Fehmarn Belt.
Trending Offshore and Sea Construction
In the coming years, a series of high-profile offshore and sea projects is expected to influence the Danish market.
The existing offshore industry of mainly oil rigs and windmill parks will be complemented by the Fehmarn Tunnel project, which has already commenced and is expected to be finished around 2029. The tunnel – which will be the world’s largest immersed tunnel – will connect the south-eastern islands of Denmark with northern Germany, allowing for a massive boost to the infrastructure for both Copenhagen and the rest of Scandinavia.
At the beginning of 2021, the Danish Parliament took the first steps towards the construction of an artificial energy island. The island will be constructed in the North Sea about 60 miles from shore using box caissons. The purpose of the island is to serve as a base for an immense windmill park and to store and transmit the harvested energy, thus reducing the need for onshore windmills and solar power facilities. It is also expected to serve as a hub for new technologies, such as Power-to-X. Ultimately, the energy island may provide enough energy to cover up to 10 million households.
Further into the future, Lynetteholmen is a whole new island to be constructed in the northern part of Copenhagen Harbour, anticipatedly between 2035 and 2070, which will be inhabited by 35,000 residents, and allow for equally as many new jobs. The island will be serviced by tunnel, bridge and metro access. Currently, principal agreement to the project has been approved by the Copenhagen Municipality.
New and Updated Agreed Documents
Danish construction law is mainly governed by agreed documents (the so-called AB Standards) and in 2018, the standards were updated.
The update codifies existing norms and principles developed and expressed by the practice of the courts and of the Danish Building and Construction Arbitration Board. The latter is the primary Danish forum for resolving disputes regarding construction works, providing, inter alia, final decisions in the form of arbitral awards. The effects of digital developments are incorporated in the AB Standards, and the update generally seeks to accommodate market practices in modern construction and forms of co-operation.
The main purpose of the update was to achieve construction works at the right time and agreed cost, free of defects and with fewer disputes. Another purpose of the update was to streamline the terms and expressions used across the documents for ease of reference and comparison. The updates to the AB Standards consist of three main documents.
The documents are supplemented by four appendices meant to tailor the agreements for the specific purposes of project development, project optimisation, in-service demands and incitements. The overall framework and regulation, however, remains the same as in earlier versions of the agreed documents.
New sections concerning dispute resolution procedures are found in the updated AB Standards. A so-called dispute resolution ladder is introduced, by which the parties are obliged to follow certain predetermined steps before initiating arbitration or requesting a “speedy resolution” – the latter being a new initiative in and of itself.
As the first step on the dispute resolution ladder, the parties must initially negotiate before requesting mediation, conciliation, speedy resolution, or arbitration, or requesting an independent expert’s appraisal. The latter is a very widely used means of evidence in Denmark. The procedure of requesting an independent expert’s appraisal can of course be initiated immediately if this is necessary to secure evidence.
Arbitration must be preceded by a four-week cool-off period following the conclusion of negotiations, and arbitration cannot be initiated while mediation, conciliation, speedy resolution or a decision concerning security provided relating to the same dispute is pending. Although the full effect of these alternative dispute resolution procedures remains to be seen, the initiatives are welcomed and are expected to draw more attention to other ways of solving disputes.
Mediation or conciliation cannot be initiated if one party wishes the dispute settled in accordance with the new rules of a speedy resolution. A speedy resolution allows for the parties to have certain specific, typical issues; issues with a limited monetary value or other issues as agreed upon, decided by an umpire within a relatively short period of time. The decision is made based on written arguments, documentation and – at the umpire’s discretion – inspection. The main purpose, among others, is to solve disputes quickly so that the matter does not escalate, thereby increasing the chance of preserving the contractual relationship and ensuring a positive construction process continuing afterwards. According to the Arbitration Board, experience with the speedy resolution process shows that the parties can expect a decision within two months. Decisions rendered by the umpire in the speedy resolution process are binding on the parties but can be brought to arbitration within eight weeks, in which case the Arbitration Board makes a final decision on the dispute.
The agreed documents AB 18, ABT 18 and ABR 18 can be used as standalone contract conditions but are often supplemented by the parties’ own special conditions to the agreed documents in order to either regulate commercial aspects and the rights of the parties or to tailor the conditions to the specific construction set-up.
Some parties still refer to the former agreed documents, perhaps out of sheer habit or due to lack of familiarity with the new documents. However, it is the authors' experience that today, the majority of contracts for larger construction projects are concluded based on the updated and current 2018 documents. This view is supported by the observations of the Arbitration Board, where increasing numbers of disputes are solved with reference to the new terms and corresponding to the new means of dispute resolution described above.
Use of Labour Clauses in Danish Public Procurement
Labour law in Denmark is characterised by the prominent role of organised unions. In what has become known as "the Danish Model", minimum wages, working time etc are not regulated by law or in other ways by general norms applicable to employers. These questions instead are managed in collective agreements applicable only to the contracting parties. As no statutory requirements exist on these matters, a procuring public entity cannot require a supplier, contractor, etc, to be part of a collective agreement. Instead, a labour clause is commonly introduced to ensure minimum working conditions and wages similar to those secured by a collective agreement for comparative work.
Over the last decade, an influx of posted workers (employees sent by their employer to carry out a service in another EU member state on a temporary basis) in Denmark has brought attention to and shed light on the issues of social dumping and wage pushes. To safeguard their pay and working conditions, labour clauses are used in all public procurements made by state entities and as such, the clauses are subject to considerable political focus.
In Danish labour law, labour clauses should be considered in connection with the ILO Convention No 94 ratified by Denmark, the Posting of Workers Directive (1996/71/E), and EU law in general. The clauses and how they are introduced by public entities must not hinder basic EU rights such as freedom of movement and the freedom to provide services.
The ILO Convention No 94 applies to all contracts regarding construction works, manufacture of materials or equipment and performance or supply of services, which involve expenditure of funds by a state entity and the employment of workers by the other party to the contract. The convention requires labour clauses ensuring wages (including allowances), work time and other conditions of labour which are not less favourable than those established for similar work in the geographic area by collective agreements between unions of “[…]substantial proportions of the employers and workers in the trade or industry concerned” or not less favourable than minimum conditions granted by arbitration rulings. Only state entities are required to use labour clauses, but the Danish regions and municipalities are encouraged to do so. Experience shows that most public entities consistently use labour clauses for large-scale projects, even if formally not obliged to.
The ILO Convention and labour clause obligations also apply to work carried out by subcontractors, and the competent authority must take appropriate measures to ensure such application. When the convention was ratified, the Danish Ministry of Employment made it clear that state authorities, including companies owned in their entirety by the state and which are not engaged in competition, are subject to the convention’s requirements.
A labour clause can lead to various associated questions, such as whether the clause or other contractual documentation entitles the employer or the main contractor to control issues lying in the periphery of the protected area of the labour clause. For instance, whether the clause warrants the employer or main contractor’s inspection of housing premises provided by a subcontractor to its posted workers – provided, of course, that the provision of acceptable accommodation is an obligation for the subcontractor, or the main contractor for that matter. The scope of the protected area is currently subject to political and union attention. The answer inherently depends on the wording of the contract in general and, potentially, the labour clause specifically, as well as due care to the right of privacy of the workers.
A contractor seeking to establish itself temporarily in the Danish construction market should take due care and seek advice on the many special characteristics of the Danish labour market, which is unlike the more regulated markets of other European countries. Along with the nearly all-encompassing use of collective agreements backed by strong unions with the right to conflict, labour clauses should be factored in before submission of an offer to the client so as to avoid unpleasant surprises eroding the contribution margin on submitted offers. In addition, even minor non-adherence to applicable clauses or collective agreements entails the risk of being met with claims for liquidated damages, compensation claims towards involved parties, etc.
Thus, labour clauses remain, along with other constructions of the Danish labour market, an important aspect to factor in and consider when entering the Danish construction market.
Is COVID-19 Considered a Force Majeure?
It has been debated whether COVID-19 or its causal effects can be considered a force majeure, allowing for ease of obligations, typically for the supplier or the contractor facing hindrances of one sort or another. The legal point of departure under Danish construction law remains the opposite. However, under specific and burdensome circumstances, COVID-19 and its derived effects may give rise to certain legal entitlements.
Overall, COVID-19 has had a somewhat limited impact on the Danish construction market at present. For some suppliers and contractors, however, effects such as limited or disturbed supply of materials and access to a consistent workforce can be felt on a regular basis.
As of May 2021, quarantine restrictions have still not been imposed during working hours for posted or commuting workers entering the country. However, other restrictions – such as quarantine upon return to the workers’ native countries – could well impact a contractor’s ability to muster a regular workforce. Suppliers and contractors are currently experiencing obstacles in the supply of building materials, one such being increased prices; eg, steel prices. Implementation of government initiatives to stop the spread of the virus at construction sites may cause hurdles to the day-to-day performance of works, which could not have been foreseen. As such, the types of hindrances are many and varying in nature.
For any measure, effect or hindrance – either by itself or combined with others – to potentially be considered a force majeure, thereby entitling ease of obligations, the supplier or contractor must have faced or be facing a scenario which is extraordinary and could not have been foreseen and avoided, of near practical impossibility to perform.
It will not be sufficient that a contractor is having difficulties in mustering its usual workforce, perhaps from abroad, if local workers are accessible, and the contractor has not demonstrated that it has done what can reasonably be expected to ensure staffing via relevant advertising, etc. It does not constitute an adequate hindrance where local workers prove to be more expensive than a contractor’s regular workers from abroad, as this risk is the result of how the contractor has organised its business, rather than a hindrance due to COVID-19.
Likewise, in principle and if put to the test, it will seldom suffice to grant an extension of time if a party is facing supply issues from its usual suppliers, if it is possible to order from other sources, however costly that may be, subject to where the additional price exceeds the (high) threshold of sacrifice, where the obligation to perform could be eased in accordance with the general rules of obligations. Assessment of whether a supply is possible or not often depends on whether the supply entails generic or special supplies and on the contractor’s freedom of choice in materials. In practice, however, the contractual parties can opt to find pragmatic solutions. Increased prices on building materials, workforce, etc, are the risk of the contractor, and without contractual entitlement to adjustment of the contract sum, the contractor bears the risk of even quite significant price rises.
An example of what could be considered force majeure are instances of impossibility of performance due to the supply of building material not being available as a result of COVID-19. Issues such as restrictions of transport or halted or impaired production on either a widespread geographical scale or locally may be relevant to consider if such local supply issue cannot be avoided or mitigated, eg, by switching to another supplier.
The party claiming extension of time due to force majeure must document its usual requirements including that the occurrence has caused a delay – ie, impacted on the critical path in the construction process. Furthermore, it must be documented that the hindrance was extraordinary and could not have been foreseen, which entirely depends on the specifics of the case. In Danish construction law, the legal consequence of force majeure is a “time, no money” cure, ie, the contractor may be granted an extension of time, but no compensation.
As such, no general rule of COVID-19 claims of force majeure in Danish construction law can be established. However, anticipated future cases will reveal to what extent COVID-19-related allegations will be argued before the courts when seeking to justify, in particular, contractors’ delays.