Contract for Work and Labour
by Axel Metzger
1. Terminology and historical perspective
Although specific provisions on the sale of goods and other types of specific contracts are common to most jurisdictions, the contract for work and labour is only recognized in some continental jurisdictions as a specific category of contracts. Those jurisdictions familiar with the category define the contract for work and labour as a contract under which the party providing the work is to effect a certain result. In contrast with a mere service contract, the debtor must not only perform services but he has to achieve a certain result. Typical work and labour contracts are construction contracts, contracts for the manufacture or repair of goods and—in some jurisdictions—contracts for the creation of immaterial works, eg expert opinions or software. Other jurisdictions qualify contracts for work and labour as service contracts in a broader sense. According to a third model, contracts for work and labour, service contracts and lease contracts are integrated into one category. This third model has its roots in the Roman law concept of locatio conductio covering a variety of contracts, especially lease and farm tenancy contracts and contracts for work including construction contracts as well as service and labour contracts. The Roman law provided a set of uniform remedies for all subcategories of locatio conductio. However, this broad concept did not prevent legal practice from developing more specific solutions for each of the subcategories over time. In the ius commune the common concept of locatio conductio prevailed, but the differences between locatio conductio rei, the letting of goods, and locatio conductio operarum, the provision of services, were more often emphasized. The 19th-century pandectists (Pandektensystem) distinguished a third subcategory, the locatio conductio operis which is the origin of today’s contract for work and labour.
2. Current trends in European jurisdictions
Today’s diversity of European jurisdictions may be explained against the background of the ius commune. Some of the older codifications have assumed the broad concept of locatio conductio. Article 1708 of the French Code civil identifies two forms of contrat de louage, celui des choses (things) et celui d’ouvrage (works). It provides for common rules for lease, service, work and labour contracts followed by more specific rules on lease on one side and service, work and labour on the other. This approach is also followed by the Belgian and Luxembourgian Code civil and by the Spanish Código civil (arrendamiento de obras). Initially, the Austrian Allgemeines Bürgerliches Gesetzbuch (ABGB) did not differentiate service contracts from contracts for work and labour and treated both categories under the common heading of Lohnvertrag. The two categories were later separated under the influence of the German and Swiss codifications. The Italian Codice civile has maintained the model of merging service, work and labour contracts into one category. It sets out different rules for contractors (appalto) and employees (opera). The younger codifications follow the pandectists’ approach of having specific rules for work and labour contracts. This is the case for the Swiss Code of Obligations (OR), the German Bürgerliches Gesetzbuch (BGB), the Polish Civil Code, the Czech Civil Code and the 2003 enacted provisions on contracts on work and labour (Aanneming van werk) in the new Dutch Burgerlijk Wetboek (BW). By contrast, English law has not followed the regulatory approach of providing specific statutory provisions for certain categories of contracts, with the exceptions of the Sale of Goods Act 1979 and some supplemental Acts and regulations. Yet, legal literature provides in-depth analyses of the specificities of the most important contracts for work and labour, especially construction contracts.
Another point of diversity is the regulatory approach to construction contracts. The older codifications did not provide for specific rules on construction contracts but submitted the complex questions raised by the construction of buildings to contractual autonomy. In some countries, legal practice developed standard terms and conditions which were used throughout the industry. Today, these standard terms and conditions are typically drafted by professional or industry associations or governmental institutions, eg the German VOB/B, the Swiss SIA-Norm 118 and the French AFNOR conditions. For England, the JCT Contracts fulfil a similar function. More recently, a tendency to implement specific statutory rules has become visible. In 1971, the French legislature enacted specific provisions regarding building development contracts (contrat de promotion immobilière). In 1978 specific rules on warranties in construction contracts were implemented. In addition, the rules of the Code de la construction et l’habitation are applicable to the construction of housing. The Polish Civil Code implemented specific rules for construction contracts in 1990. The German legislature followed in 1993 with an amendment to the Bürgerliches Gesetzbuch regarding securities in construction contracts favouring contractors. Furthermore, the new Dutch Burgerlijk Wetboek comprises specific rules for the construction of housing for non-professional customers.
Finally, the picture is heterogeneous regarding contracts for the creation of immaterial works, eg expert opinions, software or architect’s plans. In Austria, France, Germany and Switzerland, the rules on contracts for work and labour apply. In Italy, the Netherlands and Portugal, these contracts are qualified as service contracts.
3. European Union law, Draft Common Frame of Reference, international law
So far, the European Union has not enacted any specific statutory rules for contracts for work and labour, which is not surprising considering that the Union until now has not harmonized European private law in accordance with the systematic ideals of a codification, but rather has followed the policies of the founding treaties. Contracts for work and labour are covered by the free movement of services in the sense of Arts 56, 57 TFEU/49, 50 EC. Accordingly, jurisdiction of courts (jurisdiction (PIL)) for claims arising out of contracts for work and labour is governed by the rules for service contracts in Art 5(1)(b) of the Brussels I Regulation (Reg 44/ 2001). The Rome I Regulation (Reg 593/2008) has adopted the same approach for the law governing a contract in the absence of choice (contractual obligations (PIL)). The Directive on Services in the Internal Market (Dir 2006/123) is also applicable to typical contracts for work and labour. Although covered by the various provisions for service contracts, EU law provides only few rules for specific questions which are far from a comprehensive regulation of all relevant aspects of contracts for work and labour. Brussels I and Rome I are limited to jurisdiction and choice of law. The Directive on Services in the Internal Market provides for specific rules aimed at the full implementation of the free movement of services, without harmonizing the law of service contracts. Against this tendency to qualify the contract for work and labour as a service contract, Art 1(4) of the Directive on the Sale of Consumer Goods (Dir 1999/44) qualifies a contract ‘for the supply of consumer goods to be manufactured or produced’ as a contract of sale for the purpose of the directive.
By contrast, the Draft Common Frame of Reference (DCFR) proposes a comprehensive set of principles on service contracts in Book IV, Part C, covering mostly contracts qualified traditionally as contracts for work and labour. This is the case for the principles on ‘construction’ contracts (IV.C.3:101 ff) which are applicable to the construction of buildings, movable and incorporeal things. Other examples for contracts that may be qualified as contracts for work and labour are qualified in the DCFR as ‘processing’ contracts (IV.C.4:101), comprising, inter alia, repair contracts and contracts on the modification of existing immovable or movable goods. The principles on ‘design’ (IV.C.6:101) are applicable to architect’s plans and other designs created for a client. Finally, the principles on ‘information and advice’ (IV.C.7:101) also cover contracts for the provision of expert opinions. This integration of the contracts for work and labour into a broader concept of service contracts is in line with the above-described trend in EU law. The feasibility study carried out by the Expert Group on European contract law follows a more narrow concept of service contracts. It covers only service contracts which are closely related to sales contracts such as installation, maintenance or repair (Art 150).
On the international level, no convention regarding contracts on work and labour has been concluded so far. According to Art 3 of the Convention on Contracts on the International Sale of Goods (sale of goods, international (uniform law)), ‘contracts for the supply of goods to be manufactured or produced are to be considered sales’. However, Art 3 excludes such contracts if ‘the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production’ or if the ‘preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services’. Hence, typical contracts for work and labour are not covered by the CISG. For international contracts on the construction of immovable structures, the FIDIC standard terms are of practical importance. They have been drafted and repeatedly revised by the Fédération Internationale des Ingénieurs Conseils based on older English standard contracts.
4. Core elements of the law of contracts for work and labour
In the following discussion, three core elements of the law of contract for work and labour shall be analysed. One point of controversy among European jurisdictions is the question of when the payment of the remuneration of the contractor is due. According to the DCFR, the client must pay the price ‘when the constructor transfers the control of the structure or a part of it to the client’ (IV.C.3:107). However, the client may refuse the transfer of control if the work does not conform to the contract and such non-conformity makes it unfit for use (IV.C.3:106(1)). For ‘processing’ contracts, the client may only refuse the transfer of control ‘if the thing is not fit for use’ (IV.C.4:105). Making the payment of the remuneration contingent on the transfer of control is the current approach of Dutch, Polish, Spanish and Swiss law. Other jurisdictions, especially France, Germany and Italy, require for the maturity of payment that the client has accepted the work as essentially being in conformity with the contract, which is a more restrictive criterion. The DCFR and the feasibility study support the first approach which, if seen from the perspective of the contractor, may be the preferred solution. He should not be put in a position where he has to transfer the control over the work without having a right to demand for payment at the same time. However, the requirements for a legitimate refusal of the transfer of control and, as a consequence, for a refusal to pay are excessive. Under the DCFR, the client may be obliged to accept the transfer of control even if the work is not in conformity with the contract. He may decline the transfer and the payment only if the work is unfit for use. As such, the client can only hope that the contractor will remedy the lack of conformity after he has received payment. This solution is inappropriate considering that the client of a contract for work and labour—different from a client in a sales contract—may not examine the work before the conclusion of a contract.
Another issue of major importance for legal practice is the question of who should bear the risk of the destruction of the work if the contractor could not have avoided the destruction. Must the contractor provide the work for a second time to receive payment? Some jurisdictions allocate the risk to the client after the control over the work has been transferred, eg Dutch, Spanish and Swiss law. Other jurisdictions like the French, German or Italian law allocate the risk to the contractor until the client has accepted the work as being in conformity with the contract. However, this less contractor-friendly rule is mitigated by several exceptions, eg if the destruction of the work is caused by materials delivered by the client or by the instructions given to the contractor. Therefore, the differences are not as significant as it may appear at first sight. The DCFR again refers mainly to the criterion of transfer of control (IV.C.3:108).
Finally, the duties of the parties to provide the necessary information, to cooperate and—more generally—to act in accordance with good faith and fair dealing are of special interest for contracts for work and labour. In particular, construction and other large project contracts, eg contracts for the manufacture of machines or for software development, require a long-term cooperation of the parties. Typically, the civil codes and other statutory rules do not provide specific rules on the rights and duties of the parties regarding such long-term relationships. In this respect, the more detailed provisions of the DCFR may be used as a model.
Werner Lorenz, ‘Contracts for Work on Goods and Building Contracts’ in IECL VIII (1980) ch 8; Reinhard Zimmermann, The Law of Obligations (1996); Peter Gauch, Der Werkvertrag (4th edn, 1996); CEC Jansen, Towards a European Building Contract Law (1998); Jérôme Huet, Les principaux contrats spéciaux (2nd edn, 2001); Nael G Bunni, The FIDIC Forms of Contract (3rd edn, 2005); Maurits Barendrecht and others, Principles of European Law: Service Contracts (2007); Florian Jacoby and Frank Peters, ‘Werkvertrag’ in von Staudingers Kommentar zum Bürgerlichen Gesetzbuch (2008); Hugh Beale (ed), Chitty on Contracts, vol II: Specific Contracts (30th edn, 2008), Expert Group on European Contract Law, Feasibility Study (2011) <http://ec. europa.eu/justice/contract/files/feasibility-study _en.pdf>