In Lithuania construction law is not codified.

The following legal acts are applicable to legal relations in the area of construction. Currently, a special task force has been formed by the Ministry of Environment to analyse the possibility of adopting a Construction code (involving the Law of Construction and by-laws in the field of construction).

The Law on Construction

This law establishes the essential architectural requirements for the following:

• construction;
• reconstruction and repair of all buildings in the territory of the Republic of Lithuania, its exclusive economic zone and the continental shelf;
• protection of the interests of third parties;
• rules of technical standardisation of construction;
• construction research;
• design and construction expertise;
• completion of construction;
• use and maintenance of buildings;
• demolition procedures;
• principles and responsibilities of construction participants;
• public administration entities;
• building owners and users; and
• other legal and natural persons involved in the field.

Technical Regulations for Construction

The technical regulations for construction are a set of organisational administrative legal acts establishing specific construction, technical supervision and qualification requirements for participants in the construction process. The regulations also set the list of documentation for the construction work and details of the construction process, from research and design to maintenance and demolition of the building.

Law on Land

This Law regulates land ownership, management, use and administration in the Republic of Lithuania, its special economic area, and the continental shelf of the Baltic Sea.

Law on Territorial Planning

This Law regulates territorial planning of the territory of the Republic of Lithuania, its continental shelf, and exclusive economic zone in the Baltic Sea and establishes the rights and obligations of persons involved in the planning process. The objective of this Law is to ensure sustainable territorial development and rational urbanisation by establishing requirements for systematic solutions in the process of territorial planning. The Law is aimed at ensuring compatibility and interaction between plans of different levels – general, detailed, special – to sustain the natural anthropogenic environment and the quality of urban development by preserving the landscape, biodiversity and its natural and cultural heritage.

Law on Architecture

The purpose of this law is to regulate the field of architecture in order to preserve and/or create an environment of appropriate quality and in harmony with the uniqueness and culture of the country, reflecting public interest and being of lasting value. The Law establishes the requirements, conditions and procedure for the training of architects, their qualifications, performance and activities, as well as their rights and obligations.

Civil Code of the Republic of Lithuania

Book Six of the Civil Code of Lithuania is dedicated to the Law on Obligations. It consists of a general part, establishing the main principles and rules for all obligations and contracts, and a special part describing different types of civil contracts.

Chapter XXXIII of Book Six of the Civil Code is dedicated to the contractor agreement (independent work contract), describing its concept, parties to the contract, their rights and obligations, main provisions of the contract and its termination. Special regulations include, among others, consumer contractor agreements, construction contractor agreements and design and research work contractor agreements.

Law on Real Estate Tax

This Law establishes the procedure for taxation of real estate.

Higher-value construction contracts in Lithuania are usually concluded in accordance with the standard terms and conditions of construction contracts prepared by the International Federation of Consulting Engineers (FIDIC). The most commonly used forms are the Red Book and the Yellow Book.

The standard form of the construction contract is used in public procurement where construction is financed either by the state or by EU funding.

Regarding public construction contracts, the standard form of the contract should be used mandatorily.

The construction market was impacted by the COVID-19 pandemic in various ways.

At first, the COVID-19 pandemic caused turmoil in the commercial real estate market, especially in the rental sector. The government's quarantine of the country made it more difficult for tenants to fulfil their obligations under their leases because of the loss or substantially limited access to the relevant economic and commercial activities in the leased premises, especially regarding big shopping malls and/or business centres. A package of measures was introduced by the Government to partly subsidise rent payments.

To date, there have been no regulations nor clear-cut case law with regard to the COVID-19-related impact from the legal perspective, on the performance of contractual obligations (force majeure, rebus sic stantibus, etc). In April 2022 the Supreme Court of Lithuania delivered a long-awaited judgement on the subject and ruled that the pandemic or the measures taken to manage it could not in themselves be considered as circumstances of force majeure or substantial restriction on the performance of contracts. However, evaluating the particular circumstances of the case, the Court of cassation recognised them as force majeure and stated that the non-performance of the tenant's contract was justified.

In 2021, Lithuania's economy grew by 5.1%, being one of the best results in Europe. Residents have purchased a record amount of housing, while developers in the market are managing a record number of projects. The supply of new housing has decreased and the prices increased. The business centre market has been hit harder by the pandemic, with vacancies rising and rents remaining at similar levels as at the end of 2020.

In Lithuania, there are different types of employers in construction projects. Starting from public organisations (state or municipal) developing real estate projects of public interest, with about ten major development companies handling over 50% of construction projects in the country. Investment funds have gained popularity in recent years as have a number of private developers funded by local or foreign investors.

The rights and obligations of the employer depend on the specific contract entered into. Generally, however, during the contract conclusion period, the employer will:

• call for tenders, based on tender material;
• provide the plot of land for construction; and
• obtain the necessary approvals for construction.

During the construction phase, the employer has a number of management and control obligations and rights towards the contractor. Part of these obligations can be transferred to third parties (eg, the construction manager). Sustainability and green construction must be taken into consideration in all current construction projects.

According to the Law on Construction, a contractor could be a natural person of the Republic of Lithuania or a foreign state, a legal person, another foreign organisation, or a division thereof, which has the right to engage in construction and perform construction. General contractors are usually larger contractors with ample resources and manpower to oversee larger construction projects.

Currently, there are about 20 major construction companies handling the biggest construction projects on the market. Bankruptcy or restructuring is a common situation a general construction company may face. 

The traditional method of contracting in Lithuania is a design-bid-build process in which the owner contracts separately for design and construction services. Under this method, a general contractor is hired by the project owner to build, manage and oversee all aspects of construction from the start of construction through to completion, including providing the materials, workforce, equipment and the services necessary for construction.

A general contractor usually specialises in general construction works. The engineering and infrastructure aspects of the construction are handled by the companies specialising in those specific fields, according to subcontract agreements or the contracts directly entered into with the employer.

Subcontractors are, typically, companies with special knowledge in a specific area. They vary from well-known international brands to small local companies.

Subcontractors, including trade contractors, suppliers and service providers, contract with the general contractor or another subcontractor to perform a specific scope of work. Subcontract agreements set forth the subcontractor’s rights, obligations, the scope of work, conditions of payment and dispute resolution process.

Under Lithuanian law, the employer is not entitled to make direct claims against the subcontractor, or vice versa.

In 2022, a new regulation was introduced to the Labour Code, establishing subsidiary responsibility of the contractor for monetary obligations of the subcontractor towards its employees (regarding the works performed on the particular project of the contractor).

Construction projects in Lithuania are most commonly financed by banks, lenders, government agencies, real estate investment funds, EU budgets, or public entities. These entities are usually not a part of a construction contract, except for public procurement contracts, where the implementing authority could be a party to the contract along with purchasing authority.

Usually, before the construction contract is signed, the employer provides a technical design (needed for the issuance of the construction permit), which includes documents that state the scope of the works, including:

• technical specifications;
• explanatory notes;
• drawings; and
• cost-quantity work-sheets.

Accordingly, the contractor shall, on the basis of these documents, assess all the works to be carried out and prepare an estimate, detailing the scope of the work. This document, together with the technical design, shall be considered as the main documents indicating the scope of the works.

Normally, the contract itself does not specify or include a detailed explanation of the work to be carried out and the overall costs. Instead, the contract refers to the technical design and the estimate drawn up, which are annexed to the contract and form an integral part thereof.

Nevertheless, if the contract is set for the fixed price, having the estimate, does not mean, that the scope of the works is limited to the works included in the estimate. There may be cases where the contractor has not foreseen the need to carry out certain works, even though it is necessary to carry them out in order to achieve the result envisaged in the technical design. In such cases, if it is possible to identify the need for such works, the contractor must carry out them at its own expense and, accordingly, achieve the result envisaged in the technical design, despite the fact that such works are not included in the estimate.

Variation Requested by the Employer

Determinations and limitations of the variations requested by the employer are normally related to the rates indicated in the estimates. If the employer refuses to carry out any work or requests additional work, contracts normally state that the parties are to be guided by the estimated rates for the work to be carried out.

If, when additional work is required, the approved estimate does not contain a corresponding work rate, then a substantially similar work rate may be assessed. If the estimate has no similar work, it may be agreed in the contract that the cost of the additional work will be calculated by adding the contractor's profit margin to the cost of performing the work (which should be justified by the contractor).

The employer cannot opt out of certain works if the price of the contract is fixed, except when the contract provides otherwise.

Variation Requested by the Contractor

The variation requested by the contractor can be for either downsizing or upsizing the scope and price of the work.

Downsizing the scope and price

If the contractor wants to opt out of certain works, the employer's consent is required. The contractor does not have the right to unilaterally refuse to carry out the agreed works (or any part of them). If the employer agrees to reduce the scope of the works at the request of the contractor, the reduction will normally be based on an assessment of the work and the estimated cost of such work.

Upsizing the scope and price

As mentioned in 3.1 Scope, usually, the contractor may not request an increase in the scope and price of the work if it was possible to identify the need for such works from the technical design. However, if it is not possible to identify the need for such works, the price for an increase in the scope of the works is determined in the same way as when variations are requested by the employer.

The design of a project in Lithuania involves two parts:

• the technical design; and
• the executive project (which is a continuation of the technical design, detailing the solutions).

Responsibilities regarding the design process depend on the model, selected by the employer. There are three common models:

• build and design;
• build only; and
• mixed.

Build and Design

The contractor is entrusted with both, the preparation of the design and the construction work. Usually, the contractor uses professional designers to design project. In this case, the contractor is responsible to the employer for the proper preparation of the design.

Build Only

The contractor is entrusted with the construction work only and the preparation of the design is entrusted to designers chosen by the employer. In this case, the contractor is not responsible to the employer for the proper preparation of the design, as the designer who signed the contract with the employer bears all the risk.

Mixed

It commonly occurs that the technical design is prepared according to Build Only model, but the preparation of the work project is transferred to the contractor. In this case, the contractor is responsible to the employer for the proper preparation of the executive project (which is an integral part of the design), but there is no contractor’s liability regarding the technical design.

The employer (if it is not agreed otherwise) is responsible for providing the land for the construction and for establishing the other conditions necessary for construction.

The contractor is responsible for providing the materials (if it is not agreed otherwise), manpower, equipment and the performance of all the work. With some exceptions, the contractor is also responsible for the risk of accidental loss or damage to the work or part of it before it is accepted by the employer. If the contractor uses subcontractors, it is responsible for such subcontractors against the employer, even if the subcontractor was nominated by the employer. No direct responsibilities of subcontractors for the employer appear as they have no contractual relationships (including the warranty responsibilities, except, if the contractor is bankrupted or the parties agreed for the employer’s right to claim against the subcontractor directly).

Subcontractor’s responsibilities and liabilities are no different from those of the contractor to the employer. However, the subcontractor is liable to the contractor, not to the employer, against which the contractor is liable.

From the moment the construction site is handed over to the contractor, the contractor becomes responsible for the condition of the construction site. The contractor shall carry out the work in such a way as to avoid damage to the site.

Problems with the site which the contractor could not have foreseen will normally necessitate additional work. In accordance with the legislation, if the contractor could not foresee such additional works, then the employer must pay for such works if the parties agree that the contractor will carry out such works.

In certain cases (as provided for by law), archaeological investigations must be carried out prior to the execution of construction works. In this case, the underground part of the site is evaluated before construction begins.

In all cases, if archaeological finds are discovered, construction is halted until the responsible authorities have assessed whether the discovery is to be considered cultural property and preserved.

Usually, the general contractor is in charge of construction site, including work safety, fire safety issues, prevention of illegal work, etc. Recently new regulation was introduced regarding mandatory card of transparent worker for all employees entering the site. 

The main authorisation required for construction works is the building permit, which is issued to the employer. It is up to the employer to ensure that this document is obtained. This authorisation is usually obtained before the construction relationship with the contractor is established.

In some cases, other permits are also required for construction works, such as permits for work in certain communication protection zones or similar permits. Given that such permits are related to the contractor's work, it is common practice for the contractor to be responsible for obtaining such permits.

Maintenance of the works must be carried out by a suitably qualified and certified person appointed by the employer. It is regulated by law, that the maintenance person should be appointed by the employer, meaning, that they cannot be appointed by the contractor.

According to the legislation, basic maintenance work in Lithuania includes:

• checking if the construction is carried out in accordance with the construction project and legislation;
• controlling the quality of construction products and equipment used during the construction process;
• inspecting and accepting hidden construction works and hidden constructions;
• participating in the testing of engineering networks, engineering systems, equipment and constructions; and
• other functions, according to the law.

Usually, a separate maintenance contract between maintaining person and the employer is signed, where the parties detail the scope of the services to be provided and the commitments to be made.

Delegation of any other function, except construction works, such as operation, finance and transfer, is not widespread in private project development.

In Lithuania, delegating such functions to a contractor and/or a third party is usual practice in public-private partnerships. In these cases, a state or municipal authority delegates activities within its functions to a private entity, and the private entity invests in these activities the assets needed to carry them out, in return for which it receives a remuneration set by law.

The law states, that in the cases provided for by law or by the building contract, and where the nature of the work so requires, tests and control measurements must be carried out before acceptance of the work. In such cases, the works may be accepted only if the results of the tests and control measurements are positive.

However, there is no regulation on which party is responsible for carrying out the tests, therefore when tests are mandatory and who should carry them out should be covered in detail in the contract.

The employer shall, on receipt of the contractor's notification of readiness to hand over the work or, where provided for in the contract, of the completion of a stage of the work, immediately proceed with acceptance of the work. With some exceptions provided in law, the handover and acceptance of the works should be documented by a deed signed by both parties.

Notwithstanding that the employer confirms that the work has been properly carried out at the time of acceptance, in the case of acceptance by stages of the work, the parties often agree that the approval of a stage of the work does not constitute the employer's approval of the quality of the work carried out. Contracts often provide that the satisfactory performance of the works is only confirmed by the signing of the final performance certificate.

It is the date of signature of the final performance certificate that legislation links to the commencement of the guarantee period.

The contractor's periods of liability can be divided into two periods, ie, (i) before the completion and acceptance of the works; (ii) after the completion and acceptance of all the works (warranty period).

Before the Completion and Acceptance of the Works

The contractor is liable for any defects of the work performed if they become apparent before the employer accepts the contractor's work (during the period when the works are performed).

When accepting the works the employer has to check them carefully (as far as this can be done without the use of special instruments and measurements), as the signing of the acceptance and handover certificate without any comments is deemed to mean that the works have been carried out by the contractor in a satisfactory manner and that there are no defects found. In such cases, the employer may not make any claim in respect of such defects, which could have been observed during the normal course of the inspection of the work, unless they could not have been observed.

After the Completion and Acceptance of the Works (Warranty Period)

The contractor is liable for any defects of the work performed if they arose after the employer has accepted the contractor's work unless they prove that they are due to:

• normal wear and tear of the object or its parts;
• improper use;
• improper repairs carried out by the employer or persons hired by the employer; or
• another fault on the part of the employer or persons hired by the employer.

According to the law, the contractor shall be liable for the collapse or defects of the object if it collapsed or the defects were detected during the following periods:

• five years (general term);
• ten years in the case of hidden elements of the building (structures, pipelines, etc); or
• 20 years in the case of deliberately concealed defects.

The time limits shall commence from the date of handing over to the employer all the results of the construction work carried out by the contractor. The warranty time limits could be also extended by mutual agreement of the parties, but they cannot be shortened.

The legislation does not lay down a specific time limit within which the employer must inform the contractor of the defects detected, as this is left to the agreement of the parties. Therefore, the applicable criterion would be a reasonable period of time. More importantly in such cases, the defects must be established as having occurred within the warranty period. If the defects occurred after the warranty period, the contractor is not responsible.

In both cases, the employer has the right to require the contractor to:

• remedy the defects within a reasonable period of time, free of charge;
• grant a corresponding reduction in the price of the works; or
• reimburse the costs of rectifying the defects, according to the employer's right to rectify the defects as provided for in the contract.

Claims arising from defects in the work are subject to a limitation period for bringing an action in court within one year after notification on the defects.

The contractual price for the work to be carried out is defined in various ways. While the fixed price method is the most common, there are other ways of calculating the price. Below is a brief description of the most commonly used price calculation methods.

• Fixed price– the contract includes a specific price for the performance of all the works. In this case, the contractor is obliged to implement all the solutions of the technical design for the agreed price. Importantly, once the price is fixed, the law does not allow for any increase or decrease. This is a mandatory provision of the law, which prohibits (with some exceptions) the modification of a fixed price, even in cases where it was not possible to foresee with certainty at the time of the conclusion of the construction contract the total quantity of the works or the total cost of the works.
• Fixed-rate – the contract sets fixed rates per unit of measure for the works to be carried out. The final amount to be paid to the contractor is calculated on the basis of an assessment of the works actually carried out by the contractor and the contractual rate.
• Maximum price – the contract specifies the maximum possible price for all the works. In this case, the contractor is obliged to implement all the solutions of the technical design within the overall maximum price. In contrast to a fixed price, the price paid to the contractor is reduced in the event of a decrease in the number of works to be carried out, based on the actual work carried out by the contractor.

Milestone payments are generally used in construction agreements. Accounting period could be calendar month, percentage of works completed, or other stages agreed.

In the contract, the parties agree on the payment procedure and the payment period. The most common practice is for the contractor to be paid for the work performed on a monthly basis (interim payments). Such settlement is usually subject to a 30, 45 or even 60-day grace period, as agreed between the parties.

The parties may also agree on an advance payment, which is then deducted from interim payments. Depending on the agreement between the parties, the prepayment may be covered in full or pro rata with the current payments.

In the contract, the parties agree on the payment procedure and the payment period. The most common practice is for the contractor to be paid for the work performed on a monthly basis (interim payments). Such settlement is usually subject to a 30, 45 or even 60-day grace period, as agreed between the parties.

The parties may also agree on an advance payment, which is then deducted from interim payments. Depending on the agreement between the parties, the prepayment may be covered in full or pro rata with the current payments.

As a general rule, if the employer fails to meet the contractual deadline for payment, the employer shall be subject to contractual default interest. If the employer fails to fulfil its monetary obligations, the contractor shall also have the right to suspend further performance of the works and, in the cases provided for in the contract, even terminate the contract due to the fault of the employer.

Issuance of the corresponding invoice is linked to the acceptance of the work carried out. In cases where the work is accepted in stages or where the work carried out by the contractor is accepted on a monthly basis, this shall be the basis for invoicing and payment.

Parties usually agree to a starting date, milestone dates (by which the works must have reached a specific stage) and completion (final) date, sometimes a period of time from the starting date, during which work must be finished. Construction projects are usually subject to construction schedules agreed upon by the employer and the contractor. The construction schedules are usually supervised by the employer or construction manager. These schedules are usually safeguarded by monitoring the progress of the works, setting penalties for missed milestone dates and delays, linking payments with the progress achieved.

The parties to the contract must cooperate during the performance of the contract and take all reasonable measures to avoid or reduce delay. In the event of delays, the party that becomes aware that there will be a delay must notify the other party as soon as possible. Such notification should be given in writing, indicating the required time extension and the reason for the extension. Documents should be provided with this notice or other evidence confirming the reason(s) for the delay. Delays may entitle the parties to an extension of time. Provisions relating to delays and extensions of work are usually detailed in the contracts.

In the event of inexcusable delays (when parties have not reached an agreement for the extension of time, when the delay occurs not due to the employer's failure to fulfil its contractual obligations, when the delays were not caused by force majeure, etc, the employer has the right to:

• demand compensation from the contractor to cover losses caused by the delay. In such cases, the employer must provide evidence of the damage suffered and, in the event of a dispute, evidence that measures have been taken to avoid or reduce the loss;
• require liquidated damages if the milestone date is exceeded;
• in some cases, terminate the contract; or
• refuse to accept the work performed and to demand compensation from the contractor for the losses incurred due to the failure to meet the deadline, but only if the contractor violates the deadline for the performance of all work and if, as a result of the delay, the performance of the obligation has become meaningless to the employer.

In practice, the first two remedies are most commonly used.

Typically, the request for an extension of time by the contractor should be provided in writing. Detailed requirements related to the manner of submission of such a request and terms for its submission are usually specified in the contract. The basic rule is that the request should be provided immediately and should contain information such as the required time of the extension and the reason for the extension, as well as documentation proving the necessity of the extension.

The contractor is usually entitled to an extension of time if the execution of the works is delayed for the following reasons:

• changes to the ordered work made by the employer;
• circumstances for which the employer is responsible, such as the delay of other contractors in carrying out their contract works; or
• events that are beyond the control of the contractor (eg, force majeure).

If non-extension of time leads to circumstances which fundamentally alter the balance of the contractual obligations, (ie, either the cost of performance has essentially increased or the value thereof has essentially diminished), and if the parties fail to reach an agreement, within a reasonable time, on the modification of the contractual obligations (extension of time), the contractor may initiate legal action.

In Lithuanian law, the term force majeure covers exceptional circumstances which are beyond the control of the parties and could not be reasonably expected at the time of the conclusion of the contract and that the arising of such circumstances or consequences could not be prevented.

Force majeure circumstances include:

• war;
• natural disasters (eg, severe storms, cyclones, earthquakes, sea or river floods, lightning);
• explosions, fires, destruction of machinery, industrial buildings and any (or all) internal communications;
• boycotts, strikes, lock-outs;
• lawful or illegal actions of public administration institutions; and
• other force majeure circumstances.

A force majeure does not include such circumstances as:

• absence in the market of goods needed for the performance of the obligation;
• lack of the necessary financial resources on the part of the party; or
• violation of their own obligations committed by the contractors or the debtor.

It is not unusual for the term force majeure to be specifically defined in construction contracts, for example, by excluding certain circumstances from being qualified as force majeure.

In Lithuanian law there are some provisions relating to unforeseen circumstances (rebus sic stantibus), for example, stating that the contractor shall have the right to demand a revision of the price of the contract if for reasons beyond the contractor's control the actual price of the work has increased by more than 15%. Also stating that the grounds for non-application of civil liability or for exemption therefrom cover the following events which completely, or in part, may release a person from their civil liability:

• force majeure;
• actions of the state;
• actions of a third party;
• actions of the aggrieved party;
• state of necessity;
• self-defence; and
• self-help.

But in most cases, issues related to unforeseen circumstances and their consequences are regulated in the contracts and the most common result of unforeseen circumstances is that the contractor receives an extension of time and/or additional payment because of the unforeseen problems.

As a general rule, construction contracts may include provisions which limit the parties' liability. However, according to Lithuanian law, some liabilities cannot be excluded contractually, pursuant to regulatory provisions. For example, an agreement of the parties upon exclusion of civil liability for damages sustained by intentional fault or gross negligence, as well as any agreement concerning the limitation of the amount of civil liability for damages sustained by those reasons, is held null and void.

It is also prohibited to exclude or limit civil liability for impairment of health, deprivation of life or non-pecuniary damage caused to another. The Civil Code also states that the contractor that has used subcontractors to perform in violation of laws or the rules established in the contract shall be liable before the employer for any damages caused by the subcontractors in the performance of the contract. In addition, the general contractor shall be liable before the employer for the failure to perform or improper performance of the obligations by the subcontractors, and before subcontractors, for the failure to perform or improper performance of the obligations by the employer.

The concepts of “wilful misconduct” and “gross negligence” are not clearly defined in Lithuanian law but are explained in case law. Whether or not certain conduct would fall under these concepts also depends on the facts of each case. As mentioned in 6.1 Exclusion of Liability, Lithuania prohibits limitation of liability in cases of wilful misconduct and gross negligence. Categories of wilful misconduct and gross negligence are also important in situations relating to termination of the contract, because under Lithuanian law the party may terminate the contract where the failure of the other party to perform it or the defective performance thereof is considered to be an essential violation of the contract. One of the conditions that must be considered in determining whether a violation of a contract is essential is whether the non-performance is a result of wilful misconduct or gross negligence. In Lithuania, a person whose activities are connected with potential hazards for surrounding persons (including activities in the sphere of construction) shall be liable to compensate for damage caused by the operation of potentially hazardous objects which constitute a special danger for surrounding persons unless the person proves that the damage was caused by force majeure or it occurred because the aggrieved person’s actions exercised either intentionally or by their own gross negligence.

In Lithuania, it is possible for the parties to limit their liability contractually. Generally, such limitations, made by the parties in construction contracts are considered enforceable if they do not violate any applicable law and are clear and unambiguous. In construction contracts, this is mainly expressed in agreeing to a specific cap for which a party can be liable, for example, limiting liquidated damages to a specific cap and/or limiting all damages to another specific cap. These could be expressed as a specific sum of money or as a percentage of the contract price.Such contracts have provisions limiting liability for damages only to direct losses, excluding the parties' right to demand damages for indirect losses. In construction contracts, the liability of all parties could be limited to the contract. However, as an exception to the general rule, exclusion of liability shall not be applied when, for example, the party in question has acted with gross negligence or wilful misconduct.

Lithuanian law, including the Civil Code, precisely and in a balanced way divides the responsibilities and risks between the parties. However, indemnity clauses are used in construction contracts for the purposes of the management and mitigation of liability and risks in relation to construction projects.

The Civil Code of the Republic of Lithuania requires that with the act of transfer of construction works to the employer, the contractor provides a document guaranteeing the fulfilment of the obligations of the warranty period under the signed contract. This document must also be submitted when obtaining a certificate of completion of construction or confirmation of a declaration of completion of construction.

The most common forms of guarantees to be provided by the contractor are performance guarantees and the above-mentioned warranty guarantees. Usual methods of securing the performance of a contractor's obligations are a bank guarantee and a surety from an insurance company. However, other methods of securing the performance of a contractor's obligations are also used. For example, the parties to a construction contract often agree on a way to secure performance, such as withholding amounts due from the customer to the contractor. Payment of 5% to 10% of the contract price is usually withheld.

The most common methods of securing the performance of an employer's obligations are bank guarantee and a surety from an insurance company. Also, parent company guarantees, third party suretyship and other methods are sometimes used.

Lithuanian law also requires that the real estate developer (which according to Lithuanian laws is liable to the purchaser of the building or part thereof) for non-performance or improper performance of the contractor's obligations during the warranty period, provides the purchaser of the building with a document guaranteeing the fulfilment of the obligations of the warranty period under the signed contract. In the event of the insolvency or bankruptcy of the contractor the documents must ensure that:

• the employer is reimbursed for the costs of repairing the defects caused during the first three years of the building's warranty period; and/or
• the payment to the acquirer of the building of the costs of eliminating the defects caused by the contractors during the first three years of the building's warranty period.

The amount of defect removal assurance during the three-year warranty period of the building must be at least 5% of the construction price of the building.

According to Lithuanian law, it is mandatory for the civil liability of a building designer, a project design (or part thereof) expert, a maintenance supervisor and, sometimes, a builder (employer) to be covered by insurance. The civil liability of the contractor performing construction and reconstruction of a building, repair, renovation (modernisation), demolition and cultural heritage building maintenance works must be covered by insurance. The party on whom the duty to insure the construction object or their civil liability is placed must submit to the other party the evidence of compliance with the obligation and provide information about the essential conditions of the insurance.

The parties to construction contracts can agree to have one or a few types of insurance tailored to protect owners, contractors and other project participants, for example, construction risk insurance, construction suretyship insurance or insurance of specialised machinery, etc.

With respect to the consequences of the insolvency of a party, construction contracts in Lithuania often include provisions which entitle the non-insolvent party to terminate the construction contract.

Even if such provisions are not included in the contract, situations related to the insolvency of a party are regulated by the law on the insolvency of legal persons. The main rule is that from the moment of the coming into effect of a court ruling to open a bankruptcy proceeding, it is considered that the time limits for the discharge of all obligations of a legal person have expired. However, there are some exemptions, for example, such a legal person (contractor, subcontractor) has the right to pursue economic and commercial activities, including continuing to fulfil their obligations under a construction contract, but only if the outcome of such activities would reduce the number of creditors’ claims more than the sale or transfer of the assets used for those economic and commercial activities.

Risk and responsibility-sharing is possible in constructional contracts (as long as it does not conflict with mandatory legal provisions). Some issues related to the risk and responsibility sharing are laid down in law. For example, the Civil Code states that the contractor has the right to demand a revision of the price of the contract if for reasons beyond their control the actual price of the work has increased by more than 15%. Parties have the right to agree on risk-sharing conditions such as conditions related to time extensions, damages for delay, terms of payments, etc. However, such agreements are not common and usually the risks are borne by the contractor.

Requirements Relating to Specific Professionals

Normally, by contract, the contractor undertakes to appoint a responsible construction manager who has an appropriate engineering degree, qualifications and appropriate certificates to support their qualifications.

Contracts also often include an obligation for the contractor to appoint a construction and design safety and health coordinator who is responsible for the implementation of the safety and health requirements during the construction work.

General Requirements

In the case of special works, the contract may also require employees to take special examinations, courses or training before starting work (eg, training in safe behaviour on railway tracks and in the protection zones of railway installations).

The contractor shall ensure that all persons performing works on site are entitled to work in the Republic of Lithuania.

In almost all cases, the contracts include the contractor's obligation to ensure that its employees and/or third parties under the contractor's responsibility are not under the influence of alcohol, drugs, narcotics, toxic and/or psychotropic substances during the execution of the works.

The possibility of using subcontractors and the corresponding restrictions depend on the nature of the contract, ie, whether the contract is between private parties or between a private party and a public entity.

Private Parties Contracts

In the case of a contract between two private parties, the possibility of employing subcontractors is normally provided for in the contract and no further restrictions are imposed, nor is there any additional restriction provided for by legislation.

However, in certain cases, contracts may contain provisions requiring the contractor to obtain the employer's consent before employing subcontractors. Also, in certain cases, the parties may agree that the subcontractor's candidature must be approved by the employer. In some contracts the employer has the right to delegate a particular subcontractor and the contractor is obliged to enter into a contract with the delegated subcontractor. However, whichever is the case, the contractor remains liable to the employer for the proper performance of the obligations of the subcontractor.

Private Individual and Public Entity Contracts

In the case of a contract between a private entity and a public entity, the public tender conditions shall specify the possibility of using subcontractors. The tender conditions may either allow or disallow the use of subcontractors.

The tender conditions may provide that the subcontracting of the works is not allowed. In such cases, all the work must must be carried out by the contractor.

If the tender conditions authorise the subcontracting of works, the contractor normally, at the initial stage of the tendering procedure, must indicate to which subcontractor they intend to subcontract the work. Usually, such subcontractors may not be changed at a later stage without the consent of the employer.

Contracts with designers or with a contractor (where the contractor drafts the design documentation) normally include a clause that the designer transfers to the employer all proprietary rights in the intellectual property created. In such cases, the rights to reproduce the work in any form or by any means, to distribute the original or copies of the work by sale, etc, are transferred to the employer.

However, with regard to moral rights (the right to claim authorship of the work by expressly indicating the author's name on all copies of the work published, the right to require that the author's name be indicated or omitted in any use of the work, etc), the legislation expressly provides that these may not be transferred to other persons.

Breach of a construction contract usually gives the injured party (both the employer and the contractor) the following remedies:

• the right to terminate the contract; and
• the right to claim damages, as direct or indirect damages, or as liquidated damages.

Depending on the situation, both remedies may apply.

Where a construction contract provides for liquidated damages for a particular breach, but losses are also incurred, these are to be included in the amount of the liquidated damages, with only losses in excess of the amount of the liquidated damages being recoverable as additional damages.

Employer’s Remedies in Relation to Delay and Defects

If the contractor fails to start the contract on time or performs the work so slowly that it is manifestly impossible to complete it by the due date, the employer has the right to withdraw from the contract and to claim compensation for damages.

If it becomes apparent during the performance of the work that it will not be carried out properly, the employer shall be entitled to give the contractor a reasonable period of time within which to remedy the defects and, if the contractor fails to do so within the period prescribed, to withdraw from the contract and claim damages, or to instruct a third party to remedy the defects at the expense of the contractor.

If defects are detected at the time of acceptance of the work, the employer shall have the right to refuse to accept the result of the work, but only in cases where substantial defects are detected which make it impossible to use the result of the work for the purpose provided for in the construction contract and if the defects cannot be remedied by the contractor or the employer. In the absence of these conditions, the result of the work shall be accepted, usually with an obligation on the contractor to remedy the deficiencies within a certain time limit.

In the event that, after acceptance of the result of the work, the employer discovers that the work performed is defective in such a way that the object cannot be used for its intended purpose or that such use is restricted, the employer shall be entitled to:

• ask the contractor to remedy the defects free of charge within a reasonable time;
• reduce the price of the work;
• reimbursement of the costs of rectifying the defects, if the employer’s right to rectify the defects was provided for in the contract.

The employer's claims may be waived if it is established that the employer was aware of the defects in the works at the time of acceptance or should have been aware of the defects if the employer had examined them carefully at the time of acceptance.

Contractor’s Remedies in Relation to Delay

If the employer fails to fulfil their obligation to pay the remuneration or any other sum agreed between the parties in the contract, the contractor shall be entitled to:

• demand liquidated damages (usually called default interest) which, according to the law, shall amount to 6% per annum for overdue monetary obligations, unless another amount is agreed in the contract;
• recover sums due under the contract from the employer’s equipment, remaining materials and other property belonging to the employer until the employer has paid it in full; and
• to withhold the result of the work until the employer has duly fulfilled their obligation.

Remedies in Design Contracts

In design contracts, the remedies available to both the employer and the contractor are essentially similar to those available in construction contracts.

If deficiencies are detected in the performance of the design contract, the employer is entitled to require the contractor to remedy the deficiencies in the technical documentation free of charge and to indemnify the employer against damages.

Construction contracts can, and often do, limit the application of certain remedies. For example, contracts often limit damages to direct damages only, and damages may be limited to a certain amount or percentage of the contract price.

Liability of the parties may also be limited, but if certain provisions distort the balance of interests between the parties, such provisions may be declared void in the event of a dispute. For example, it is not possible to limit a party's liability where the loss is caused by the party's intent or gross negligence.

Unless the parties themselves limit the application of remedies in their contracts, there are in principle no such limitations in the law.

Parties to construction contracts often agree on the application of liquidated damages when the employer is late in paying for the work or when the contractor is late in performing the work. It is also common for contracts to treat delays in the execution of the works for a specified period of time as grounds for termination of the contract.

Unless the parties themselves restrict the application of the remedies in the contracts, there are, in fact, no such restrictions in the law.

Typically, the parties agree that losses arising under construction contracts are limited to direct damages, except for damages for impairment of health, deprivation of life or non-pecuniary damage caused to the parties.

In high-value construction contracts, it is common for the parties to agree to withhold a certain amount due to the contractor. It is usually agreed that, of the invoice price of the works, the employer retains a 5% to 10% to secure the contractor's contractual obligations. For example, if the contractor fails to remedy the defects identified, the amount retained could be used to remedy them. The retained part of the sum is usually paid to the contractor after a certain agreed time limit, for example, two years from the handover of the work, or upon the provision of other security for the contractual obligations.

Suspension of contractual obligations is not very common in construction contracts. As a general rule, delays in payment do not entitle the contractor to suspend its obligations or to extend the time limit for completion of the contract. However, the law does entitle the contractor to suspend the execution of the works if it is found that additional works are required which are not covered by the contract. The suspension of the works is valid until the employer expresses its position on the execution of such works which should correspond to violation made by the other party.

Disputes arising from construction contracts can be heard at first instance before the district or regional courts. If the value of the dispute exceeds EUR40,000, the dispute will be heard at first instance by the regional court. Otherwise, it will be brought before the district court. In the first case, the court of appeal will be the Court of Appeal of Lithuania, and in the second case a territorial regional court. In both cases, the cassation appeal is lodged with the Supreme Court of Lithuania.

Territorial jurisdiction is usually determined by the defendant's domicile. However, the court in whose territory the place of performance of the contract was located may also be chosen.

Usually, the parties agree in their contracts on the court of the country where the dispute will be heard and the law to be applied. However, the parties may not change the statutory jurisdiction by assigning the case to a district or regional court. Only the territorial court may be chosen by the parties.

The Parties may agree that any dispute arising out of the construction contract shall be settled by arbitration, mediation or negotiation.

In Lithuania, there is the Vilnius Court of Commercial Arbitration, a permanent arbitration institution with its own list of recommended arbitrators. Its activities are governed by the Law on Commercial Arbitration and the Rules of Arbitration Procedure. If the parties do not agree on the method of arbitration, the dispute is usually settled in court.

Both before or during the court proceedings the dispute can be resolved by a mediator (impartial mediator), who may be a judge or other legal professional.

A peaceful settlement agreement concluded by the parties (both in court and before the trial) can be submitted to the court for formal approval. A peace agreement thus approved has the force of a court judgment, which may lead to an application for enforcement if the obligations in the agreement are not met.