A wave of bankruptcies may be faced due to rising construction costs
Due to circumstances beyond their control, construction companies are no longer able to fulfill contracts and obligations, therefore a wave of insolvency proceedings and bankruptcies of construction companies is possible in the near future, said Jānis Loze, a sworn lawyer of the law firm “Loze & partneri”. In addition, this applies to guests involved in the construction process – both general contractors and subcontractors, therefore, in his opinion, this situation needs a quick solution. Loze believes that one, relatively simple solution, which has already been used during the economic crisis caused by Covid-19, is a ban on initiating insolvency proceedings against construction companies for a certain period of time. This solution would “buy time” for the entire industry – it would allow construction companies to be kept in a functioning state and give an opportunity to arrange relations between all those involved in the construction process. The second solution would be for construction project clients and executors to agree on how to compensate for the price increase. Loze emphasizes that it will not be easy. On the one hand, it is clear that it is no longer possible to build at the prices set in the previous contracts, but on the other hand, it is difficult or even impossible to change the contract terms and prices in contracts with state institutions, municipalities and wherever European Union co-financing is involved. He believes that this is an emergency situation, even more acute than during Covid-19, and some kind of solution must be found. Loze recommends looking at the experience of other countries – information from foreign countries shows that where the parties come to a solution, it is found in such a way that 70-80% of the price increase is compensated by the customer, and 20-30% by the executor. However, such a decision requires a national decision. If it is not possible to reach any of the mentioned solutions, the builders and the judicial environment of Latvia will have the opportunity to test the concept of force majeure in the courts, says Loze. According to him, there has been a case of force majeure – the war and the drastic increase in the price of materials and energy caused by it. “Therefore, it would be advisable for builders to inform the other contracting party about this circumstance and, in this regard, propose either the termination of the contract or the revision of its terms,” advises Loze.
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