The Land Use and Building Act (132/1999) is the primary piece of legislation regulating construction, land use and planning in Finland.
Several subordinated regulations and decrees regulate in more detail, eg, the technical requirements of buildings.
These regulations are issued by the government and relevant ministries pursuant to the Land Use and Building Act.
In addition, certain matters, such as energy efficiency and requirements for construction materials, are regulated in separate laws.
The Land Use and Building Act
Note: the act is currently under reform and some amendments are expected.
The Contracts Act (228/1929)
Use of standard contracts is not mandatory. However, they are generally widely applied throughout the contract chains in construction projects in Finland. Some of the terms are already dated and do not fully take some factors into account, eg digitalisation. Currently, deviations to the standard agreements are agreed widely between different parties throughout the subcontracting chains to reflect, eg, division of design and project management responsibilities between the parties in different forms of construction projects.
Standard contracts include YSE 1998 General Conditions for Building Contracts, KSE 2013 General Conditions for Consulting and RYHT 2000 General Procurement and Delivery Terms for Construction Products. In larger and more complex construction projects and especially in the field of infrastructure, the FIDIC (International Federation of Consulting Engineers) terms may also be used.
These terms are widely used between employer/contractor and contractor/subcontractor for construction works contracts.
These terms are commonly used between client/consultant for design and consulting services.
These terms are widely used between buyer/supplier for construction materials procurement throughout the construction chain.
These terms are widely in use in the employer-contractor relationship. The type of FIDIC contract depends on the scope and risk allocation. Some of the most used terms are:
COVID-19 has impacted the construction market in Finland in several ways, such as:
In Finland, the companies that act as an employer in a construction project are typically developer/constructor companies, or sometimes project companies or real estate companies established for the purpose of the project. A significant portion of the employers are also public organisations or entities.
It should be noted that in Finland the risk allocation and general rights and obligations depend heavily on the chosen type of the construction project. Parties can agree freely on the division of responsibilities under the contract. However, the most common contract types are:
In Finland, companies that act as a contractor in a construction project are typically construction companies. Contractors are always responsible for the construction works and procurement of all related construction materials, but depending on the contract type, they may also have responsibilities for design and/or construction management. Usually, the employer arranges the finance for the project but sometimes, especially related to residential building projects, the contractor may also act as the developer of the project. In this case the contractor is also arranging the finance. Usually, the contractor co-ordinates the subcontractors and side contractors, and reports to the employer.
Subcontractors are usually smaller companies specialised in specific field of construction such as electricity, civil works, HVCA and earthmoving.
According to YSE 1998 terms, the contractor needs to inform the employer of any subcontractors used in the project and the employer may refuse the use of a specific subcontractor for due cause. The contractor always carries total liability of the subcontractors’ work towards the employer.
The co-ordination obligation of subcontractors’ work on site is usually carried out by the contractor. However, the division of responsibilities between different subcontractors is set out in the project agreement documents.
In Finland it is common that a specific real estate company is established for the construction project. The real estate company then acts as the employer of the project. Typically, investment management companies and funds act as financiers of the established real estate company, thereby indirectly financing the construction project. In addition, sometimes the construction company is carrying out the project based on so-called founder contracting, where the construction contractor acts as the property developer and the financing of the construction is at least partly covered by selling of the building premises in parallel with the construction works.
The scope of each party is defined in the main construction contract, and other contract documents enclosed to the contract, which include usually, eg, the building contract programme, building contract requirements, protocol for the contract negotiations, the division of responsibilities table, invitation to tender by the employer, tender documents by the contractor, specifications, designs, safety rules and safety programme, etc.
YSE 1998 terms stipulate a procedure to manage any changes to the agreed scope due to modifications in building plans occurring during the construction phase. These variations are divided into modification works and additional works. A modification work may be a change, increase or reduction of works, whereas the additional works are works that did not originally form part of the obligations agreed under the contract. The pricing of the variations to the agreed scope is usually agreed in the agreement, eg, by setting out a unit price list that will apply in case of any agreed change orders during the project.
As a main rule, the contractor is obliged to carry out any modification works requested by the employer. The only exception is when the requested modification would significantly alter the nature of the scope agreed in the building contract. On the other hand, the contractor is also entitled to increase the contract price in the event there is an increase to the agreed obligations due to a modification in the building plans. The contractor has an obligation to notify the employer of any modifications in advance and, as a general rule, no modification work may be commenced before the parties have agreed on the effects of the modification works to the project schedule and contract price.
The responsibilities related to the design process depend on the contract between the parties and the type of construction project. In Finland, parties may agree freely on the division of obligations and the allocation of risk. However, the responsibility of design is usually determined by choosing the type of the construction project. In Finland there are standard contract templates published by the Confederation of Finnish Construction Industries RT for different project types. These templates can be freely modified by the parties, but they form a base for the risk allocation, when used.
In a divided multi-party construction work project and all-in works contract, the liability for design lies with the employer. In design-build contracts and turnkey contracts the contractor is the party responsible for the design responsibilities, and in project management contracting the responsibilities can be agreed to be carried by either party.
The division of responsibilities regarding the construction process may be agreed in several ways, but usually after the design phase the allocation of responsibilities is as follows:
Responsibilities of the Employer
The employer is responsible, eg, for the following:
Responsibilities of the Contractor
The contractor is responsible for all the work carried out by the contractor or any subcontractor within the agreed scope. The contractor shall further ensure that the construction works are performed in accordance with the agreement documents, such as designs and specifications, and that it meets the requirements of construction regulations and is of good professional practice and industry standard.
In addition, the contractor is responsible for the co-ordination of the works of different subcontractors on site and schedule planning and management during the whole project.
Further Obligations of the Contractor
Unless agreed otherwise, the following obligations concerning the work of the contractor also apply to every contractor and subcontractor:
In addition, there are other obligations to be met by the contractors, which are indicated in the contract documents.
The responsible party for ensuring the condition of the soil of the planned site is the owner or the possessor of the real estate, ie, the employer. By mandatory law, Finland has a principle according to which the party that has caused pollution shall bear the liability thereof. However, secondary liability lies with the owner of the property.
The employer shall carry out all the relevant surveys and studies related to, inter alia, pollution, underground obstacles and geotechnical conditions on the site and further provide any reports and findings as part of tender request documentation.
The contractor has an obligation to review all the reports and findings related to the construction site and further inspect the site before commencing the works. In the event the contractor identifies a reason due to which carrying out the construction works according to the planning is not possible, the contractor has an obligation to notify the employer of the matter without delay.
During the construction phase, the contractor is usually responsible for ensuring that the construction site meets the regulatory requirements (eg regarding safety) set out for construction projects. The building inspection authorities can close down the construction site in the event the site does not meet the regulatory requirements.
According to Finnish law, almost all construction projects require a building permit that is granted by the regional building supervision authority. Application for the permit must be filed before the construction commences and the process is typically carried out by the employer. The requirement of other permits depends largely on the location and type of the construction project.
Under YSE 1998 terms, unless otherwise agreed, each contractor carries the obligation for obtaining the permits required for the works under their scope.
During the construction phase before the handover, it is the contractor who is responsible for maintenance of the works. This is due to the fact that it is the contractor who bears the risk of damage or loss related to the works and materials during the construction phase.
After the handover of the project, the maintenance obligation transfers to the employer. Also, in the event the employer takes part of the works in use before the handover, the maintenance obligation and the risk of loss or damage related to such part lies thereafter with the employer.
Other functions of the construction process, such as operation, transfer or finance, are typically not instructed by the employer to the contractor or other third parties, but there are exceptions in relation to specific project types.
When the construction works are completed and the works are ready for the handover, the contractor needs to first pre-inspect the quality of the work that it is under obligation to carry out, and correct any deficiencies and defects detected. After the contractor’s pre-inspection, the works can be inspected by both parties in the handover inspection.
Inspection of construction goods and building components must be carried out on site before they are taken into use, and continuously during the work. Operational inspections of systems and installations shall be carried out in the form of performance tests before taking into use or, at the latest, in connection with the handover inspection when the system is ready and functioning. The contractor shall bear the costs of customary tests of construction goods and building components and for ascertaining the quality of works.
Qualified supervisors appointed by the employer monitor and supervise the works continuously. The supervisors and the employer have a right to inspect the site and the works any time and to carry out tests that they deem necessary. It is important to note that these inspections do not diminish the contractor’s liability and responsibility for the works.
Both the employer and the contractor have a right to request the handover inspection when the works are at a stage where any work still in progress can be completed before the handover inspection takes place.
Before the handover inspection, the contractor needs to pre-inspect the quality of its works and that the works meet the requirements stated in the contract, and in case any defects are detected, correct such deficiencies and defects before the actual handover inspection takes place.
In the handover inspection it is assessed whether the finished result of the construction works fulfil the criteria stated in the contract. Minor finishing works yet to be completed do not prevent the handover in the event they will not cause impediment or harm when the works are taken into use.
In the handover inspection the employer prepares a protocol, in which it is stated whether any agreed obligations have been left unfulfilled and if the works are approved for handover. In addition, the parties agree a schedule for the minor finishing works to be carried out.
After the handover of the works, the contractor has a liability for any defects for a guarantee period of two years unless otherwise specified in the contract. During this time, any detected deviation to the contract requirements must be repaired or replaced by the contractor. The contractor’s work covered by the guarantee also includes additional and modification work.
During the guarantee period the contractor is obliged to repair all defects, which the contractor cannot establish to have occurred for reasons beyond its control, for example by showing that the defect is due to normal wear and tear, or caused by incorrect use or neglect of maintenance measures for which the employer is liable.
Defects that create impediment for using the works or cause danger or disrepair must be repaired or removed by the contractor without delay. If the contractor fails in carrying out the repairs, the employer shall be entitled to carry out the work at the expense of the contractor after the employer has given prior notice of this to the contractor in writing.
If the defect is such that its correction is not necessary for the use of the building, and the cost of the repair would be unreasonable, the contractor, instead of repair or replacement, is obliged to reimburse the loss in value to the employer.
To secure its rights, the employer shall notify the contractor within reasonable time after the defects were discovered or should have been discovered. If the employer fails to notify the contractor within reasonable time, it may lose its right to claim the rectification of defects.
Even after the two-year guarantee period, the contractor is liable for any defects that the employer could reasonably not have noticed during the handover inspection or during the guarantee period, and that are due to gross negligence, work left uncompleted or a material failure of contractor’s quality assurance process. The contractor is released from this liability after ten years have elapsed from the handover inspection.
In Finland the price may be agreed as a fixed price or as time- and material-based, or a combination of these two. The methods to establish the price can be agreed freely between the parties. However, the most common way to establish the price is to agree on a fixed price with a milestone payment plan.
The price usually includes all the construction materials and work necessary for carrying out the agreed scope. The scope, which needs to be covered by the price, is presented in the employer’s invitation to tender documents, based on which the contractor will calculate the price to its tender.
The parties can agree the payment term and the delayed interest rate in their agreement.
Unless agreed otherwise, the contractor may claim delayed interest stipulated under the Interest Act, if the employer does not fulfil its payment obligations within 14 days from a legitimate invoice.
In addition, the contractor has a right to terminate the agreement in the event of non-payment, provided that the contractor has notified the employer of the termination threat in writing and has given the employer a reasonable time to correct the non-payment. Instead of terminating the agreement, the contractor may also interrupt the works temporarily until the payment obligation is fulfilled.
It should be noted that the employer may have a withholding right related to the contract price not yet paid, eg in the event of delay or defect on the contractor’s side.
The parties can agree on the invoicing in the construction agreement.
Unless otherwise agreed, the invoices must be paid when the invoice is presented to the employer and the corresponding work stage under the contract is found to be completed or the invoice has otherwise been accepted to be due for payment. If the contract does not include a payment schedule or other provision on the arrangements for payment, the employer must pay the contract price to the contractor in the form of instalments, where the part payment to be paid is in proportion to the works carried out.
The final instalment of the contract price must be paid on the date defined in the payment schedule. Unless defined otherwise in the payment schedule or the contract, the final instalment must be paid after the handover, but at the latest after the final settlement of the accounts is completed, or when the financial relationship of the contracting parties has otherwise been settled.
An increase in the contract price or, correspondingly, a reimbursement, on account of additional or modification work, must be paid to the contracting party once the modification or additional work is completed. In the case of fairly extensive modification or additional work, the parties may agree on paying the compensation in several instalments as the work progresses.
The employer prepares a high-level main schedule for the different phases of the construction project, which guides the more detailed planning of different project phases (design and planning phase, procurement phase and execution phase).
Unless otherwise agreed, the employer will also prepare the project/design schedule together with the contractor.
Unless otherwise agreed, the contractor is responsible for planning and scheduling the works under his scope. The main contractor is also responsible for preparing the site construction schedule and coordinating the works together with the other contractors and the employer. The approved construction schedule will be followed by all the parties of the project and, except for minor refinements, changing of the schedule shall be agreed jointly.
It is common that specific milestones with set dates are agreed between the parties and such milestones are also associated with delay penalties and milestone payments.
Both parties have an obligation to notify the other party without delay in the event a party becomes aware of an event or hinder that could cause a delay to the construction project. A party shall notify the other party of the expected duration of the delay and the mitigation actions that the party is planning to carry out in order to prevent the delay.
A delay on the side of the employer may entitle the contractor to an extension, provided that the contractor has notified the employer of the grounds for the extension and the likely duration of the required extension in writing.
According to YSE 1998 terms, in the event of delays the employer is entitled to claim a penalty. The penalty must be paid for each working day that the construction works remain uncompleted beyond the times agreed. The parties can agree the amount of the penalty as they wish, but YSE terms state the penalties that will be applied unless otherwise is agreed.
According to YSE terms, the penalty for delay is 0.05% of the contract price exclusive of value added tax for each working day the works are delayed (0.1% in subcontracts). The penalty for delay shall be calculated for a maximum of 50 working days for the completion of the works, and a maximum of 75 working days if the milestones with set dates are included in the agreement. The employer is not entitled to any other compensation for the delay unless the contractor has acted wilfully or with gross negligence.
According to YSE 1998 conditions, the contractor is entitled to request an extension of time in the following circumstances:
To secure its rights to the extension, the contractor must without delay notify the employer of the required extension and of the grounding for the extension, at the risk of forfeiting its right to the extension otherwise.
Force majeure is widely recognised as a contractual principle in Finnish case law. A force majeure event is generally an unforeseeable event beyond the parties’ control that could not have been reasonably avoided or overcome and that is not attributable to the other party. Force majeure may include events such as war, strike, natural catastrophes, pandemic, etc. It is possible to contractually limit or exclude certain circumstances from being qualified as force majeure.
Under the YSE 1998 terms, force majeure is defined as:
In case of force majeure the contractor is entitled to suspend the works and receive an extension to the agreed completion time and milestones, but only part of the costs incurred to the contractor due to such suspension are covered by the employer.
The parties are entitled to terminate the contract if it is necessary to interrupt the construction works for a long and indefinite period on account of a force majeure event.
Unforeseen circumstances are not governed by mandatory or regulatory law. The subject is contractually agreed upon by the parties. Unforeseen circumstances may qualify as a force majeure event if the conditions mentioned in 5.5 Force Majeure are at hand.
According to Finnish general legal principles and case law, damages caused by wilful misconduct and gross negligence cannot be contractually excluded. In addition, parties cannot exclude their liability based on the mandatory Product Liability Act, which is also applicable in the field of construction.
Wilful misconduct and gross negligence exist under Finnish law. The terms are defined in the Criminal Code and the concepts are also well-established under contract law and form a firm principle of the type of liabilities, which cannot be contractually excluded. Based on the freedom of contract principle, parties can agree on limitations of liability under a contract, except to the extent a party has acted wilfully or with gross negligence.
Parties can agree contractually on limitations to their liability. However, in the construction field, extensive limitations to one’s liability are quite exceptional and limited in their content.
Under YSE 1998 conditions there is only limitation regarding damage that could not have been avoided even if the party had acted in all due care. According to YSE terms a contracting party shall not be liable for any damage that it could not have avoided, even if it had taken all possible care.
Liability to a Third Party
The same principle also applies to the contractor’s liability to a third party.
Under YSE 1998 terms the contractor is liable for any loss, damage or harm caused to a third party and to the third party’s property during the construction works. The contractor is not, however, liable for loss, damage or harm that is an unavoidable consequence of the work that had to be carried out and that even by taking the utmost care, the contractor could not have avoided.
The contractor is nevertheless liable for any loss or damage irrespective of negligence for which the liability results from mandatory law, such as the Product Liability Act.
In construction projects in Finland, indemnity clauses are typically used only as regards to damage caused to third parties in relation to personal injury, death or damage to property.
Typically used guarantees under construction projects are guarantee for construction period and guarantee for warranty period, and at times advance payment guarantee.
Under YSE 1998 terms, the guarantee for the construction period is 10% and the guarantee for the warranty period is 2% of the construction price excluding VAT. A guarantee can be provided by a bank or other financial or insurance institution, or it can be a deposit of money in a financial institution. A parent company guarantee does not qualify for a guarantee unless the parties agree that such guarantee is sufficient. Generally, on-demand guarantees are not used in the construction industry, except in complex projects.
Providing guarantees can apply to both of the parties depending on what has been agreed, but it is typical that at least the contractor will provide the guarantees. In the event the parties agree that the employer shall provide a guarantee for its contractual obligations, the amount of guarantee is 10% of the contract price exclusive of VAT under YSE terms.
According to the YSE 1998 terms, the contractor is obliged at its own expense to take out insurance for the replacement value of the building project, construction products and working materials procured for the purposes of the works. However, the parties may agree to deviate from this main rule in the construction contract.
Insurances for a Construction Project
Unless otherwise agreed, the contractor responsible for site management duties is obliged at its own expense to take out insurance for the replacement value of the building project and construction products, and any working materials procured for the purposes of the works under the agreed scope.
The insurance must also cover any subcontracts as well as procurement of goods and services by the employer and other insurance objects specified in the contract documents. If the project does not have a contractor responsible for site management duties, each contractor shall be responsible for insurance covering its own work.
The employer notifies the contractor of the estimated value of the nominated subcontracts, procurement by the employer and other objects of insurance in the invitation to tender.
If the value of an insurance object changes significantly, the insurance sum shall be adjusted in line with the value of the object. The corresponding change in the insurance premium must be covered or reimbursed to the contracting party.
The insurance shall be taken out as contractors’ all-risk insurance or other indemnity insurance that covers the insurance object for unforeseeable events such as loss due to a fire or malicious damage, including demolition and clearance costs. The insurance must remain in force until the entire insured building project is handed over, and it must also cover loss or damage arising from any work undertaken after the handover during the guarantee period. The general responsibility for the insurances after the handover lies with the employer/building owner.
Insurance must be taken out in the building owner’s name from a financially sound insurance company that engages in general insurance activity in the country in which the building project is located. The sum insured must at all times correspond to the full value of the insurance object, including any additional and modification work. Unless otherwise agreed, the deductible in the insurance may not exceed 0.5% of the contract price between the contractor and the employer.
The insurance policy or the certificate issued by the insurance company pertaining to the insurance that is in force must be provided to the employer before instalments payable on any work or procurement can be made.
Subcontractors are obliged to take insurances for the building project as separately agreed. In addition, all the contractors working on the site shall have valid business liability insurance.
Insurances for Repair Work
Unless otherwise agreed, the contractor’s insurance obligation in repair work of older structures is limited to the value of the repair. The building owner must notify the contractor of any valid buildings insurance and further notify the insurance company of the repair work.
Each contractor shall itself be responsible for insurance of its construction equipment and also for insurance of its construction products and working materials in repair work.
Under YSE 1998 conditions, both the employer and the contractor have the right to terminate the contract if the other party is declared bankrupt, or it is otherwise deemed likely that the party is unable to fulfil its contractual obligations.
In the event it is deemed likely that the party in unable to fulfil its contractual obligation due to insolvency, the party may avoid the termination by providing a sufficient surety to secure the performance of its obligations.
In Finland the parties are free to agree on risk allocation in the contract as they deem fit. Using model agreement templates that are fit for certain types of construction project, and general terms such as YSE 1998 terms, risk is allocated based on the chosen agreement model and construction project type.
Project alliance is a relatively popular project delivery model in Finland. In this delivery method the parties assume joint responsibility for the design and construction of the project. The joint responsibility is realised through a joint project management organisation and a contract according to which the parties share both positive and negative risks related to the project.
Under the YSE 1998 terms there are number of obligations directed to the contractor regarding personnel working on the construction project.
First, the contractor must have a sufficient number of skilled employees to carry out the building contract works. The contractor is obliged to provide the employer with information concerning the number of persons working on site and all persons must have an individual identifier when on site.
Management Obligations of the Contractor
Further, the contractor responsible for site management duties must have a foreman in charge of the building site who manages the building work and is responsible for ensuring that the work is carried out in accordance with the Building Act, the Building Decree and the building regulations.
Each contractor must operate with management that is sufficient and competent for the demands of the building contract works and must appoint a person in charge of the work for the full period of the construction. The employer must be able to contact the contractor’s representative, and the representative must always be available on site as required.
Health and Safety at the Site
The contractor responsible for site management duties must appoint a person responsible for eg, ensuring that the general management on the site is sufficient from the health and safety perspective.
In addition, each subcontractor must appoint a competent and accountable person for the management and supervision of its work, who shall be responsible for observing the rules concerning health and safety at the site.
If a person employed by the contractor proves incompetent or unsuitable to the extent that the work performance suffers and the matter is not rectified after a written notice from the employer, the person must be replaced with another more competent person.
In addition to the conditions in YSE terms, in Finland there is the mandatory Act on the Contractor’s Obligations and Liability when Work is Contracted Out, which also needs to be complied in construction projects. The purpose of the act is to promote fair competition between companies as well as compliance with terms of employment on the labour market.
Before concluding the agreement, the contractor must ensure that its subcontractors comply with their statutory obligations. Compliance with obligations is verified by providing the information listed in the Act on the Contractor’s Obligations and Liability when Work is Contracted Out:
Each contractor is responsible for obtaining these reports and documents from their subcontractors.
Subcontracting is widely used in the Finnish construction industry and thus all Finland's general terms and industry standards acknowledge the use of subcontractors.
YSE 1998 Conditions
Subcontracting is allowed under YSE conditions. However, the contractor must obtain an approval from the employer for the main subcontractors. The leverage of the employer when choosing the subcontractors is, however, limited, since the employer can refuse to approve the subcontractor only with a due cause.
The due cause can exist, eg due to the subcontractor’s failure to fully comply with the provisions on quality assurance, or neglect in payment of taxes or employer’s contributions.
The contractor shall assume responsibility for any works carried out by the subcontractors and further ensure that duties performed by the subcontractors are carried out in accordance with the time schedule.
KSE 2013 (Construction Consultation, Design)
According to the KSE 2013, the consultant is not entitled to use another consultant as a subconsultant while performing its duties without the client’s consent. The client’s consent is not required when subcontracting routine or minor tasks under the consultation agreement.
If subconsultants are used, the consultant shall inform the client of this. The consultant is liable for the subconsultant’s work as it were its own.
As for intellectual property rights, YSE 1998 terms only govern copyright. According to YSE terms, the basic principle is that each contracting party shall retain the copyright for their own drawings and other planning documents. Using the other party’s planning documents in other projects is prohibited without the party’s permission.
Also, according to the KSE 2013 terms, which are widely used in construction consultation and design agreements, the client may not utilise the materials delivered by the consultant for another object or purpose than the one specified in the contract without the consultant’s consent.
Under the KSE 2013 terms the client is, however, entitled to any invention created during research or development efforts in the course of the agreed assignment. The consultant is entitled to additional compensation if the client’s right to the invention proves to be substantially more valuable than the compensation paid to the consultant. Miniature models and other illustrative materials paid for by the client are considered to be the property of the client.
There are several remedies governed under the YSE 1998 conditions in the event of breach of contract. The remedy available depends on the type and severity of the breach.
Contractor’s Breach of the Agreement
If the contractor neglects to fulfil one of its obligations under the contract, the employer is entitled to fulfil the obligation at the expense of the contractor, if the contractor fails to rectify the situation within a reasonable time limit after receiving a written notification from the employer of the breach.
The employer may claim the expenses related to the neglect from the contractor either by setting off an equivalent amount of the contract price as being paid, or by debiting the expenses separately from the contractor.
Employer’s Breach of the Agreement
In the event the employer fails to pay the works in time or in the event the employer otherwise breaches its obligation under the contract, the contractor may claim the costs for the breach from the employer and suspend the works, provided that the contractor has notified the employer of the breach in writing and the employer has not corrected the neglect within reasonable time.
Termination of the Agreement
Both contractor’s and employer’s material breach of the contract may lead to situation where the other party is entitled to terminate the contract as a remedy. YSE conditions include detailed provisions concerning situations where the termination of the contract can be used. The contractor is also entitled to temporarily interrupt the work as a remedy instead of termination of the contract.
Before the contract is terminated, the party must draw the other party’s attention to the termination threat by notifying the other party in writing of the threat to terminate the contract, unless the neglect is corrected within a reasonable time.
In Finland it is not very common to contractually limit the remedies available to a party under general terms of YSE 1998. However, as the general terms are relatively old and do not always provide a sufficient protection for the parties’ rights in today’s projects, it would be recommended to carefully assess whether any modifications to the YSE 1998 terms would be necessary and especially consider whether the allocation of risk and remedies available are sufficient.
Sole remedy clauses are not typical in construction contracts in Finland.
In relation to delay, the employer’s options for remedy are usually limited to claiming liquidated damages (delay penalty). In the event of delay, the employer may not seek for any other damages except the agreed delay penalty, and this could be seen as a sort of a sole remedy clause. However, if the delay is due to wilful misconduct or gross negligence, the liability of the contractor is not limited solely to the delay penalty, but the employer can also claim damages caused due to the delay.
Unless the parties have agreed otherwise in the construction contract, there are no limitations of the type of damages that a party is obliged to compensate due to a breach of the agreement. As a general rule, the parties are entitled to the full compensation with no maximum cap in the event of contract breach, unless otherwise stated in the construction contract. A contracting party is not, however, liable for loss or damage that it could not have avoided even by taking the utmost care.
However, as explained in 5.3 Remedies in the Event of Delays, the contractor’s liability for delay is limited to the obligation to pay a delay penalty unless the delay is caused wilfully or by gross negligence.
As mentioned in 5.5 Force Majeure, under YSE 1998 conditions the contractor has the right to temporarily interrupt the work until it can be seen whether the force majeure event will inevitably lead to termination of the contract. In such cases the contractor must provide a written notice to the employer stating the cause for the interruption.
The contractor is entitled to suspend the contract works temporarily if the employer does not fulfil its payment obligation or any other obligations that materially affect the execution of the building contract, or if the employer through its actions prevents completion of the construction works in accordance with the contract.
The contractor is also entitled to suspend the works if the employer is deemed to be in a situation where it cannot be expected to appropriately fulfil its contractual obligations. The employer can avoid the suspension by providing a reliable additional surety or a report of the fulfilment of the obligations within one week of the contractor’s written notification of the suspension.
As for the employer, it is a common remedy for employers to withhold a payment or set off a claim from the agreed payments in the event the employer has a claim against the contractor due to a contract breach such as delay.
If nothing else is agreed in the construction contract between parties, the respective district court is competent to adjudicate disputes related to construction contracts.
It is possible and fairly common for the contracting parties to agree on alternative dispute resolution means in the construction contract.
Arbitration is commonly used in the larger construction project contracts and the YSE 1998 conditions also include provisions concerning arbitration. If arbitration is used as a dispute resolution method, it is typical to agree on the arbitration procedure in accordance with the Rules of the Arbitration Institute of the Finnish Chambers of Commerce. Arbitration procedure is governed by the Finnish Arbitration Act.
In addition, parties may agree on dispute resolution by means of mediation and different kinds of mediation clauses have become more and more popular in construction contracts, partly due to the high costs related to other dispute resolution alternatives.
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Unforeseen Circumstances: Price Fluctuations and Commonly Used Finnish Construction Contract Terms
The past two years have witnessed a historical period of major price fluctuations and other types of hindrances in the construction industry. COVID-19 caused significant price rises for some central construction materials, such as steel. Furthermore, a shortage of skilled personnel was prompted when foreign labour to Finland was restricted due to the new and continuously changing entry rules related to COVID-19. Russia's invasion of Ukraine has caused even further price volatility and more hindrances, as we have witnessed immediate and steep rises in the prices of steel, gas and fuel due to the sanctions imposed on Russia. For the time being, the market situation is highly unpredictable, and shortages of critical raw materials or utilities may arise in the foreseeable future.
Index-based pricing has become more common after the outbreak of COVID-19 in construction contracts, but there are still ongoing projects agreed under fixed-price, partly due to parties concluding binding agreements at an early stage of the project way before the actual execution phase and realisation of costs.
Finnish construction projects are mainly governed by the industry standard “General Conditions for Building Contracts YSE 1998” (YSE terms in short). As the name implies, these industry standards have been in use since 1998. How have these time-tested general terms met the challenge of securing parties’ rights during the turbulent times of the past two years?
According to the YSE terms, unless otherwise specifically stated in the contract, changes in costs and salaries shall not increase or decrease the agreed contract price. The only exception to this general rule is related to changes in costs due to change of mandatory law or degree. The general rule thus is that YSE terms do not account for amending the construction contract due to unforeseeable price fluctuations.
Under the YSE terms, this general rule is very strong. Although the YSE terms include separate sections on effects of force majeure and unforeseeable events, these sections are limited to situations where the work is delayed due to the event. YSE simply does not recognise the possibility to adjust the contract price, not even if due to force majeure or other unforeseen event, it becomes substantially, and unreasonably, more expensive for the contractor to carry out the construction contract.
Index-linking and other price adjustment mechanisms
The YSE terms include alternative conditions for governing the fluctuations of price with indexation of the contract price, if the parties choose to link the contract price to indexes. Index-based pricing is an effective means to mitigate the risk of price fluctuations of materials, wages and other costs related to the construction project.
In addition, the YSE terms do not limit freedom of contract between the parties. Thus, instead of index-based pricing, the parties can also freely set the criteria and mechanism for amending the contract price in the event of material changes in the costs associated with the construction contract. Such criteria and mechanisms should, however, always be very carefully considered and drafted. Typically, broadly drafted price adjustment clauses in a construction contract tend to create uncertainty, as specifics of the price adjustment are open for interpretation and, thus, negotiation.
Force majeure and unforeseeable events under the YSE terms
Under the YSE terms, force majeure or an unforeseen event may entitle the contractor to an extension of time, limited cost compensation for the cost caused by suspension of work, or even the right to contract termination – but not adjustment of contract price.
In the current global situation, this may lead to an unbalanced and unwanted allocation of risk between the parties, and it is not surprising that in recent years more comprehensive provisions of force majeure events have become a common part of carefully negotiated construction contracts that are based on YSE terms.
Finnish contract law and price fluctuations
The current highly unpredictable market situation has recently caused a lot of debate around the question of whether the general rule of the YSE terms could be superseded by legal arguments based not on the wording of the contract itself, but rather on more general principles of Finnish contract law. The most notable potential basis for such arguments is discussed below.
The Finnish Contract Act governs instances of unreasonableness. According to the Contract Act, if a contract term, including the contract price, is unreasonable or its application would lead to an unreasonable result, the term may be adjusted or set aside. In determining what is unreasonable, regard shall be given to the entire content of the contract, the positions of the parties, the circumstances at and after the conclusion of the contract, and to possible other factors that may have significance in the matter. It should be noted that according to the Contract Act, a contract term, which has been perfectly reasonable at the time of conclusion of the contract, may become unreasonable due to change in circumstances after the conclusion of the contract and shall, therefore, be adjusted or set aside.
It is thus possible that an abnormal price fluctuation due to an unforeseeable world event such as a pandemic or a war could be argued to be the type of circumstance occurring after the conclusion of the construction contract, which may call for an adjustment of the contractual clauses, including price. However, it must be noted that the construction contract is an instrument by which the parties have agreed on the division of risks. Therefore, any adverse circumstance is not to be deemed grounds for adjustment, but the circumstance must be highly exceptional and have grave implications. It should also be emphasised that the threshold to adjust contract clauses based on the unreasonableness under the Finnish Contract Act is set very high in Finnish legal praxis. However, the current circumstances – a worldwide pandemic and a war affecting the market – can also be argued to be extremely exceptional.
Therefore, according to the Finnish Contract Act, even if the contract price has been reasonable and fair at the conclusion of the contract, if unforeseeable price fluctuations have later made the contract price unreasonable, it could be argued that the price should be adjusted. It is thus possible that in the event of dispute, a Finnish court might adjust the contract price if it deems that the price has become unreasonable due to abnormal price fluctuations, which took place after the conclusion of the contract. Even if the applicability of the Finnish Contract Act would have been excluded in the contract, it is not possible to entirely remove the possibility of adjustment due to unreasonableness, as the possibility of adjustment due to unreasonableness may be seen to originate from general contract law principles, which are always applicable.
The Finnish Contract Act further states that if it would be unreasonable to enforce the rest of the contract after the adjustment of a specific term that has become unreasonable, the rest of the contract may also be adjusted or declared terminated. Therefore, in extreme cases of price fluctuations and the subsequent adjustment, the entire construction contract could be adjusted or even terminated. In case of price fluctuations this is usually not expected, as the contract price may typically be adjusted without making the entire contract unreasonable.
Finally, it should be noted that the concept of hardship, which is described for example in the UNIDROIT Principles, is not recognised in Finnish contract law. However, as an adjustment due to unreasonableness, which has appeared after the conclusion of a contract, and an adaptation of the contract due to hardship would likely lead to very similar results, Finnish contract law does include the instruments to react to hardship-like situations. In addition, in our legal praxis the doctrine of underlying assumptions of the contract (ie, a doctrine according to which a contract party, whose rights would be adversely affected, could avoid the contract in the event of a justifiable basic assumption on the surrounding circumstances on which the contract is concluded is materially changed) is acknowledged. However, its application in the Finnish courts in relation to price fluctuation is very uncertain.
In conclusion, the general rule in construction contracts under the YSE terms is that unless the contract clearly states otherwise, price fluctuations do not affect the contract price. On the other hand, YSE terms already include the possibility for linking the contract price to a suitable index (such as the Finnish Building cost index), and do not limit freedom of contract between the parties. It is, however, good practice to carefully assess the need to supplement the YSE terms in the contract to achieve a fair risk allocation between the parties.
In the absence of price adjustment clauses in the construction contract, the Finnish Contract Act and generally regarded contract law principles may also allow for an adjustment of the contract price due to unreasonableness, which has arisen after the conclusion of the contract and is due to an unforeseeable event causing price fluctuations that make it exceptionally unreasonable for one of the parties to fulfil their contractual duties. However, the Finnish courts have traditionally been disinclined to adjust commercial contracts between companies. Adjustment would thus require an exceptionally unreasonable change in the contract balance.
After a long period of a relatively stable cost environment, the market situation seems likely to remain highly unpredictable for the time being, as shortages of critical raw materials or utilities may arise in the foreseeable future. This elevated risk of cost volatility can be allocated between the parties in many ways. In the current situation, efficient risk allocation should be evaluated by the contracting parties on a case-by-case basis for every new contract.
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