LEGAL CONSIDERATIONS REGARDING CONSTRUCTION WARRANTY CLAUSE

The warranty clause in a construction contract serves as a safeguard for the lawful rights of the project owner and as a benchmark for determining whether the contractor has fully discharged its obligations. A clear and well-structured agreement for construction warranty clause, established at the negotiation and contract-signing stage regarding the scope of rights and obligations of each party, as well as the mechanisms for enforcement and performance security during the construction warranty period, not only ensures the quality, functionality, and durability of the work once put into operation, but also provides a solid legal basis in the event of disputes.

On the construction warranty period

The construction warranty clause shall be subject to the agreement between the employer and the contractor. Within the same contract, the parties may agree on different warranty terms applicable to each construction item, facility, or technological equipment supplied by the contractor.

It should be noted that the agreed warranty term must comply with the statutory minimum period corresponding to the type and grade of the construction work (if applicable).

Pursuant to Decree No. 06/2021/ND-CP, the warranty term for construction works or work items funded by public investment or state capital other than public investment shall not be less than 12 months. For works financed by other sources, the parties may refer to and adopt the same minimum period. However, certain specific works are subject to mandatory longer warranty terms, such as 60 months for apartment buildings and 24 months for detached houses.

The commencement and expiration of the construction warranty term should also be clearly negotiated and recorded in the contract, commonly by reference to specific dates aligned with the overall project schedule. By law, the warranty term shall commence upon completion of the construction phase or the delivery, transportation, or operation of equipment, as recorded in the acceptance certificate.

A transparent and detailed timeframe constitutes one of the most decisive legal grounds for assessing whether the Contractor has duly fulfilled its obligation to remedy defects, as well as for determining the point at which the Employer is required to complete the final payment.

On the mechanism for securing construction warranty obligations

To ensure that the contractor duly performs its construction warranty obligations and to provide a contingency plan in the event of a breach, the parties may agree on a mechanism to secure compliance throughout the construction warranty term. Two common methods in construction contracts include a “retention sum” or a “warranty bond” issued by a bank, with a validity period no shorter than the construction warranty term.

The minimum warranty value (or warranty amount) is prescribed by law at between 3% and 5% of the contract value, depending on the grade of the construction work, and is applicable to works funded by public investment capital or state capital other than public investment. For works financed by other sources, the parties may refer to and adopt the above statutory benchmark.

In addition, the contract should also expressly provide for circumstances constituting a breach, the conditions for recourse to the warranty amount, and the point at which the contractor is entitled to the release of the retention sum or the discharge of the warranty bond, as the case may be.

On methods of enforcing construction warranty obligations

An equally important yet sometimes “overlooked” aspect concerns the methods by which the employer may require the contractor to perform its construction warranty obligations, in other words, the communication channels that ensure such requests are formally valid.

In addition to the conventional and most common form, written requests bearing the signature of an authorized representative and the corporate seal, the parties may consider expanding acceptance to other forms, such as fax, email, or their equivalents, in urgent cases where timeliness and convenience are necessary to meet practical needs.

Regardless of the form of request, the parties should ensure: (i) the authority of the employer’s representative making the request; (ii) the contractor’s ability to receive and access such information; and (iii) the evidentiary certainty of the request, in order to prevent potential disputes between the parties in the future.

Furthermore, the contract should provide for a reasonable timeframe for the Contractor’s response, the Employer’s follow-up actions, and a coordination mechanism between the parties in addressing defects.

In conclusion, the construction warranty clause is not merely a technical component of a construction contract but also a vital legal instrument to safeguard the legitimate interests of both parties. Drafting such a clause requires prudence, compliance with applicable laws, and reflection of the parties’ actual needs and mutual understanding. To ensure validity and minimize risks, the parties are well advised to seek legal counsel or construction law experts from the negotiation stage, thereby establishing a contract that is robust, comprehensive, and practically effective.

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