Cyprus: Construction (2nd edition)

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This country-specific Q&A provides an overview to construction laws and regulations that may occur in Cyprus.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction-2nd-edition/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    Cyprus is neither an absolutely common law jurisdiction, nor an unquestionably civil law jurisdiction. It is in fact a mixed legal system, a unique jurisdiction.

    More specifically, in the domain of private law principally common law and the doctrines of equity, long codified in statutes, accompanied with corresponding rules of procedure and evidence are applied. On the other hand, in the domain of public law administrative law is applied based on the continental tradition, namely the Greek model which is itself predominantly based on the French Droit Administratif. Moreover, the country and the legal elites identify with, and are active participants in, European law and institutions.

    All of these are reflected in the Cyprus Constitution of 1960, when Cyprus became an independent Republic and was enacted, in accordance with the Courts of Justice Law of the same year, according to which the Courts of Cyprus apply mainly:

    (a) The Constitution of Cyprus which embodies and guarantees all the fundamental human rights and liberties, on the model of the European Convention on Human Rights.

    (b) The Laws which have been retained by virtue of the Constitution.

    (c) The principles of Common Law and Equity, and

    (d) The Laws enacted by Parliament, after 1960.

  2. What are the key statutory obligations relevant to construction and engineering projects?

    The most significant legislation relevant to construction and engineering progress, is the Streets and Buildings Law (Cap. 96) which was introduced in 1946 and regulates the construction of all building and civil engineering works. According to this Law, the construction of buildings and streets is illegal unless a building permit is issued. This Act, however, has the most numerous amendments and modifications of any other law of Cyprus. To this day, the Streets and Buildings Regulation Law (“the Law”), which was first issued in 1959, together with the Town and Country Planning Law 90/72, was first approved in 1972, but enacted as late as 1990 and define the development and building control system of Cyprus. Parties may not contract out of the obligations prescribed in Law.

    In addition, the following regulations have been issued:

    • Streets and Building Regulations
    • Streets and Buildings (Energy Efficiency of Buildings) Regulations
    • Streets and Buildings (Electrical and Mechanical Installations) Regulations
    • Streets and Buildings (Energy Efficiency of Buildings) Regulations are issued in order to regulate the requirements and procedures for the issue of building permits with the provision of Directive 2002/91/EC of the European Council for the energy efficiency of buildings.
    • Streets and Buildings (Electrical and Mechanical Installations) Regulations regulate the certification of these type of installations and the qualification of the eligible engineers.
  3. Are there any specific requirements that parties should be aware of in relation to: (a) health and safety; (b) environmental issues; (c) planning; (d) employment; and (e) anti-corruption and bribery.

    (a) health and safety:

    The Local Authority has the right to ask for any drawings, sketches, calculation and any other information which is considered necessary to ensure that the building to be constructed provides for the health and safety of the users. The Local Authority may, through an order, close down any building, which, considers to be prejudicial to health due to e.g. bad ventilation or dangerous due to e.g. structural defects. If the Local Authority determines that a structure is in such a condition as to be dangerous, they may issue an order to the person who has an interest in the use of the structure.

    (b) environmental issues:

    Every application for a building permit that concerns large projects such as golf courses, marinas and harbours, is accompanied with a valuation of the estimated environmental impact. The valuation must locate, describe and evaluate the direct and indirect impact that the construction may have on any person, the flora, fauna, natural landscape, water, atmosphere, soil, sea and climate.

    (c) planning:

    Planning applications must be submitted and planning permission obtained from the local Town Planning Authority for all types of development.

    (d) employment:

    The contractor is obliged to insure its personnel and maintain such insurance in effect throughout the execution of the contract, and shall ensure that its subcontractors shall do the same.

    (e) anti-corruption and bribery:

    The legal framework against bribery and corruption principally comprises:

    • The Prevention of Corruption Law, Cap 161.
    • The Civil Servants Law, Law 1 of 1990.
    • The Criminal Code, Cap 154.
    • The Law Ratifying the Criminal Law Convention on Corruption, Law 23(III) of 2000.
    • The Political Parties Law, Law 175(I) of 2012.
    • The Law on the Illicit Enrichment of Public Officials and Officers, Law 51(I) of 2004.

    All these laws have been amended since they were introduced.

  4. What permits, licences and/or other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    Broadly speaking, the construction of any building and street is illegal, unless a building permit is issued by the Local Authority. This is enshrined by the Article 3 of the Law.

    In order for any development, or in fact any material change of use to take place, these are the following steps required:

    1. First an application needs to be submitted to the competent Planning Authority, which should assess whether the proposed development is compatible with the provisions of the Town and Country Planning Legislation, the provisions of the relevant published Development Plan and any other material consideration.
    2. After the issuing of the planning permit, an application needs to be submitted to the designated Building Authority, and after its examination a building permit is granted.
    3. Once the building is finished, the Municipality/District Office/Town Planning Department is invited to check that it has been built in accordance with the town planning and building permits issued for its construction.
    4. Buildings are not always constructed in accordance with these town planning and building permits. In these situations, new applications must be made for a revised town planning permit (cover permit) and a revised building permit (cover building permit). Once the cover permits have been issued, the Municipality/District Office/Town Planning Department is invited once again to check that it is in order.
    5. Once the Municipality/District Office/Town Planning Department has inspected the building a certificate of final approval must be sought from the Building Committee.
    6. If a building forms part of a development, a division permit is sought. This enables the authorities to subdivide the building so that a title deed may be issued.
    7. Once a division permit has been issued, a certificate of approval of the division permit is required. This follows a similar procedure to that of the certificate of final approval: through a civil engineer and the Building Committee.

    Illegal building is a serious and widespread problem. If the property developer has built illegally, commits a criminal offence and, independently of the imposition of an administrative fine, the authorities have the power to issue a “Demolition Order” requiring the illegal building or any part thereof to be pulled down within a period of two months, unless, in the meantime, a permit is obtained from the relevant authority.

  5. Is tort law or a law of extra-contractual obligations recognised in your jurisdiction?

    The tort law is recognized in Cyprus. Most construction claims are contractual claims, but tortious claims are typically relevant to construction projects in the context of alternative claims for negligence.

    It is common to make a claim against a construction professional in contract and alternatively in tort. Claims in tort can benefit from extended limitation periods.

  6. Who are the typical parties involved in a construction and engineering project?

    The parties will vary depending on the nature, size and complexity of a project. Every project will have an employer (sometimes referred to as the “client” or “owner”) for whom the works are being carried out and a contractor. Contractor is an entity that performs construction work pursuant to a construction contract. Either the employer or the contractor may procure materials, plant and equipment from upstream suppliers.

  7. What are the most popular methods of procurement?

    The three most common methods of procurement are the traditional method, design and build, novation agreement and project management.

    Under the traditional method, the employer chooses to procure the project with the traditional way, where the consultants – design team (Civil Engineer, Architect, Quantity Surveyor etc) are appointed directly by the Employer and therefore, are contracted directly with him.

    Design and build contract is when the Employer procures the project through a contract which includes the design and construction of the project. The consultants – design team consist part of the team of the Contractor. The design and build Contractor who successfully bids for the works, engages his own designers (or more commonly novates the original designers) to complete the design and then builds the project.

    The Employer can choose to import to the conventional structure of the project the novation agreement, which allowing him to novate his place (in the contract with the consultant) with the Contractor. Through this agreement a direct conventional relationship can be created between the Contractor and the consultant and vice versa.

    Less common, is the construction management method whereby the employer enters into (i) a contract with a construction manager and (ii) a large number of contracts directly with the various trade contractors.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    The form of construction contract chosen by the parties and especially by the employer who is the grantor of the project/sponsoring authority in the project financing, defines the allocation of risks during the installation of the project.

    The most commonly used forms of contract in Cyprus are the FIDIC, the AIA, the NEC3 and the JCT Standard Forms. These forms tend to place the majority of the construction risks on the construction contractor and ensure a fixed price for the implementation of the works.

    On large, complex projects, the standard forms of contract are usually subject to extensive amendment by the parties.

  9. Are there any restrictions or legislative regimes affecting procurement?

    Law 12(I)/2006 as amended, is the principal legislation governing public procurement contracts in the Republic of Cyprus. The Law, which transposes EU Procurement Directives 17/2004 and 18/2004 into Cyprus’s legal system, provides for the coordination of procedures for the award of public works contracts, public supply contracts, public service contracts and related matters.

    Also relevant are the 2007 Regulations on the coordination of procedures for the award of public works contracts, public supply contracts, public service contracts and related matters issued under article 89 of the Law. Law 11(I)/2006 as amended, which provides for the coordination of procurement procedures in the water, energy, transport and postal services sectors, is also of relevance.

    An unsuccessful bidder may file a hierarchical recourse with the Tenders Review Authority (TRA). The TRA has the authority, inter alia, to confirm the decision of the awarding authority, or annul the decision of the awarding authority if it finds that it contravenes the applicable legislation. The competence and structure of the TRA and the procedures it is required to follow are governed by Law 104(1)/2010 as amended, which implements Directive 2007/66/ EC with regard to improving the effectiveness of review procedures concerning the award of public contracts.

  10. Do parties typically engage consultants? What forms are used?

    Yes. The role and responsibilities of the Consultants in a project have direct relationships between themselves and depending on the procurement method of the project and the conventional structure which is selected during the early stage of the procurement.

    On most occasions, the consultant acts as the Contract Administrator. The appointment of the consultant as a Contract Administrator can be done by a standard agreement or by a non-standard agreement.

  11. Is subcontracting permitted?

    Yes. It is common for the main contractor to subcontract the majority of his obligations to third parties. In general, the main contractor will remain liable to the employer under the main contract for any default arising from subcontractors’ performance. The main contractor, however, is not vicariously liable in tort for the performance of his subcontractors.

  12. How are projects typically financed?

    Cyprus has embraced alternative financial mechanisms during the past few years in order to overcome its funding challenges and develop its infrastructure without the use of public money.

    BOT, DBFO, are some of the project finance mechanisms that have been utilized in Cyprus in order to help the government develop its infrastructure through private sources of funding; relieving it from traditional costs and risks.

    Therefore, the government is no longer the sole funding carrier for public infrastructure. Such projects now depend on the multilateral agencies and development banks that finance these types of projects by loan mechanisms.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    The use of construction surety bonds in Cyprus is common in projects that involve substantial construction work and lengthy provisional contracts. In public contracts, surety bonds are mandatory in every contract worth more than €20,000 and in the vast majority of contracts worth over €2,000.

    The most common surety bonds currently used in construction contracts in Cyprus are the following:

    • Bid bonds: These bonds are usually valid for a specific period of time, usually a month more than the bid validity period.
    • Performance bonds: These bonds are active until the expiry of the contract’s liability period or until a maintenance bond is issued.
    • Maintenance bonds: These bonds expire with the expiry of the maintenance period.
    • Payment bonds: These bonds are never used in construction contracts in Cyprus, despite the fact that the vast majority of contractors never pay their subcontractors or suppliers on time and many of them never pay them at all.
  14. Is there any specific legislation relating to payment in the industry?

    The Registration and Control of Contractors Law of 2001 (Law 29 (1) /2001).

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    Pay-when-paid clauses are not permitted by Cyprus jurisdiction.

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Indeed, construction contracts commonly provide for a proportion of the contract sum to be withheld by the paying party until the works are practically complete. Retentions are amounts of progress billings that are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts, or until defects have been rectified.

  17. Do contracts commonly contain liquidated delay damages provisions and are these upheld by the courts?

    Conventional damages are a special category found in construction contracts, which are also known as liquidated damages. They are a predetermined amount of money that becomes chargeable without court proceedings if specific violations occur, such as delay in completing work beyond the agreed time.

    Construction contracts, especially in the public sector, very commonly prescribe the rate of delay damages, which actually replace the normal right of a party to claim general damages, which are claimed in court, and which are calculated from the amount the damage actually suffered by the innocent party.

    However, it is important to be able to separate contractual damages from penalties, which are not enforceable by the courts. For example, if a predetermined contractual compensation proves that it is not the result of an accurate and / or reasonable calculation of potential damage and is, on the contrary, excessive, then the Court may consider that provision as a sanction.

  18. Are the parties able to exclude or limit liability?

    A limitation of liability clause is valid under Cyprus law, as long as the parties agree to include such a provision in their agreement. Usually, the parties agree to set a cap on the liabilities transferred to the contractor by the project company, limiting in this way the available forms of claims against the contractor for loss, damages, consequential loss etc. Additionally, the parties tend to pre-agree the maximum liquidated damages that will be available for non-completion of the project on time.
    However, these caps are not applying to claims for:

    1. The death or personal injury of a person,
    2. The Employer’s insurance and
    3. Third-party claims, where those parties choose to claim against the project company instead of the contractor for their own reasons.
  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    Freedom of contract is recognized and there are very few restrictions on the parties’ rights to terminate. Contracts frequently provide for several grounds for termination, including the right to terminate for convenience. In addition, there is a common law right to terminate if the other party commits a repudiatory breach of contract, i.e. a breach so severe that it demonstrates an intention of the party in breach not to be bound by the terms of the contract.

    Force Majeure Clause is an expression used to describe a situation in which a party to a contract is excused from his responsibilities in whole, or he can suspend or ask to extent his responsibilities because of a particular event or a series of events in his life beyond his control. This concept is recognized in Cyprus.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    The doctrine of privity of contract means that a party who is not a party to a contract cannot take advantage of any rights under that contract.

    Rights of third parties to claim in tort are limited as it is generally not possible to recover pure economic loss without a contractual relationship.

    As an alternative to collateral warranties, since the introduction of the Contracts (Rights of Third Parties) Act 1999, non-parties have the ability to enforce specific rights under the contract. These rights are generally set out in a schedule to the main contract.

  21. Do contracts typically contain strict provisions governing notification of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    Where time bar provisions are clearly expressed on the contracts, the Cypriot courts will recognise them as conditions precedent to claims.

  22. What insurances are the parties required to hold? And how long for?

    Contractors All Risk Insurance is an insurance policy that covers all risks associated normally with a construction project. Issued commonly under the joint names of a contractor and a principal (client), it is usually also including public liability insurance.

    Period of Cover until the time the contractor leaves the site or others may be in-force for a longer maintenance period, after the owner takes control of the property but while the contractor continues to remedy minor defects.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    In fact, there are no specific courts, tribunals or procedures in Cyprus concerning construction and engineering matters. In this complex technical environment of construction law, the pertinent disputes are typically resolved in litigation. This involves subrogation claims, insurance problems, delay and disruption claims, construction defects, design deficiency and tax issues.

    As regards the civil actions, these usually concern financial requirements for construction defects and/or design deficiency and/or for construction works of poor quality and/or damage or loss sustained as a result of architectural malpractice and/or poor-quality construction materials and/or undesirable or off-specification construction work. On the other hand, the criminal aspect involves professional liability claims that resulted in injuries or even death during the construction or during the use of the finished product.

    Except for traditional legal proceedings, namely the court litigation, there are alternative dispute resolution methods, including in arbitration, which is the most common method and mediation. Cyprus arbitral decisions may be either binding or non-binding, depending on the terms of the arbitration clause or agreement. Binding arbitration decisions may be confirmed by a court and have the same significance as a court judgment. Nevertheless, a Cypriot arbitrator award cannot be appealed.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    The Cyprus courts support arbitration to a large extent: the domestic Cyprus Arbitration Law (Cap. 4), which only regulates domestic arbitrations, is officially designed to support arbitration. Moreover, arbitration proceedings are governed, apart from the Cap. 4, by the International Arbitration in Commercial Matters Law 101/1987 (the “IACM”), which adopts the basic approach of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and regulates disputes deriving from international arbitration agreements. Cyprus law recognizes an arbitral award issued by a foreign or international tribunal as binding and enforceable, regardless of the country in which it was issued.

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    Yes. The limitation periods are governed by the Limitation Law 66(I)/2012, which states that no civil action can be brought upon in respect of any cause of action after the passing of 10 years from the day when the cause of action arose, unless otherwise provided for in any other law.

    For an action arising in contract, the limitation period starts at the date of breach and runs for 6 years. In addition, for actions arising in tort, the default limitation period is 6 years from the date on which the cause of action is completed. In the case of damages for negligence, nuisance, and breach of statutory duty, however, the limitation period is 3 years. The time period is calculated from the time the cause of action is completed.

    About personal injury claims, the Court at its discretion may extend the time limit, provided that the Claimant applies within 2 years of the expiration of the limitation period.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    When there is a problem in a project resulting in loss, it may be the fault of more than one party. In such a case, multi-party disputes are common in Cyprus jurisdiction and liability is normally apportioned on a fair and reasonable basis.

    It is becoming increasingly common for consultants to request limits on liability, such as net contribution clauses, within their professional capacity. This is partly due to the increasing pressure from insurers to do so. Cyprus jurisdiction recognises these clauses.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    In this day and age, the biggest challenges facing the construction investment are the economic crisis which affects investment in the construction sector. Moreover, the role of arbitration is not binding as the arbitral decisions have to be confirmed by the Court.

    There are opportunities for investment in emerging sectors like renewable energy and for efficiencies arising out of the use of new technologies and more collaborative ways of working.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    Residential and commercial projects are attracting the most investment in Cyprus. A number of major investment projects are currently underway, including large development projects, such as, inter alia, marinas, golf courses, and more integrated, mixed–use development projects which include residential schemes, office & commercial development, as well as ventures, that will provide high-quality educational and health services. These projects are sufficiently mature to allow their integration as soon as investment is in place.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    With the role of construction technology growing so rapidly, and new-use cases emerging constantly, I consider that technology will significantly affect the construction and engineering industry in Cyprus jurisdiction over the next five years. In the 21st century, technology start-ups have created new software applications and tools that are changing how companies design, plan, and execute projects, ranging from design management to scheduling to safety monitoring.

    By providing advanced software, construction-focused hardware, and analytics capabilities, these innovative start-ups are eliminating many of the problems that have dogged the construction and engineering industry for decades, including difficulties compiling and sharing project information.

    In the future, even more tools are emerging, particularly for use-cases related to field management and performance management.