1When deciding the scope of the clients obligations, the interpretation of the contract is clearly the crucial part. Under Danish law, a matter such as the raised question will be decided by the general principles of contract interpretation, which is a system based on Common Law. The question on how a contract must be interpretated will be considered in accordance with the interpretation methods:
- The “ambiguity rule”
- Interpretation based on the natural linguistic understanding
- Interpretation based on legal/business customs
- Interpretation based on the mutual understanding of the parties
- Purpose interpretation
These principles do not always lead to the same result; thus it is required to conduct an overall assessment of the matter.
15.1. The ”ambiguity rule”
The doctrine of “in dubio contra stipulatorem”, a.k.a. the “ambiguity rule”, originates, as the use of Latin suggests, from ancient Roman Law, and has thus been a basic Common Law principle for centuries. As the title states, the doctrine implies that in case of doubt, one must interpret against the party responsible for drafting the contract, as it is found most correct and fair that the drafting party bears the risk of wrongful interpretation of an ambiguous contract. The “ambiguity rule” is more likely to be considered of special importance, if the drafting party has specific knowledge, a better bargaining power, or if other circumstances suggest a specific reason to interpret against the drafting party.
When it comes to construction law, the ancient Common Law principle concerning ambiguity is codified in the General Conditions for Provision of Works and Supplies within Building and Engineering (“Almindelige Betingelser”). The agreed documents concerning construction (AB and ABT) state that the invitation to tender by the employer to the bidder “must be unambiguous and presented so as to make quite clear the extent and nature of the service to be provided”, cf. AB92 § 2 subs 2
15.2. Interpretation based on the natural linguistic understanding
The principle of interpretation in accordance with the natural linguistic understanding can be said to overlap the “ambiguity rule”, as an unambiguous term will often not be linguistically clear.
The understanding of the term also supports an argument that the Guarantee must be depreciated to an amount excluding VAT. On the basis of a natural linguistic understanding, “the contract sum” must be understood as the amount named as “contract sum” in the contract document, and not as an amount added with VAT.
15.3. Interpretation based on legal/business customs
Courts and arbitration courts tend to consider not only the natural linguistic understanding of a term, but also the customs of certain industries and legal/business customs. This goes, of course, especially if such industrial standards have been accepted by the parties as part of the agreement
AB 92 § 1 subs. 4 state that all amounts are exclusive of VAT, unless otherwise specified. This goes not only for the contract sum, but for the Guarantee introduced under AB § 6 as well. AB 92 is the “main” general condition and ABT93 is basically a different version of AB 92 but concerning turnkey contracts.
AB 92 § 1 subs. 4 was introduced in 1992. The preliminary report no. 1246 regarding AB 92 published by an expert committee appointed by the Government simply states that this amendment on VAT is new and in accordance with industrial practices in the building industry, cf. page 61.
In his book “Entreprisegarantier, sagkyndige beslutninger og hurtige afgørelser”, (Performance Bonds, decisions on security provided and speedy resolutions) published in 2019, page 36, Christian Johansen writes that employers without VAT registration must be aware that they have to specify particularly if a performance bond must be with the addition of VAT. Although Christian Johansen’s statements in a book from 2019 might be said to be biased, the opinion is in accordance with the general assumption. The reputable professor of construction law at the University of Aarhus, Torsten Iversen writes in his book “Entrepriseretten” (Construction law) published in 2016, page 499: “If the contract does not regulate the question, claims of liquidated damages are without the addition of VAT”.
The official legal guidance for AB 92 regarding § 1 subs. 4 says that:
“VAT
AB § 22 subs. 6 establishes a special rule that the performance bond for contractual delivery of prepaid non-delivered materials must be with the addition of VAT ”unless otherwise specified” and is primarily written to secure that the term is not contradicting § 22 subs. 6. Addition of VAT in a performance bond presented after §§ 6 and 7 will be an unacceptable deviation.”
The general conditions have been published in revised versions aimed towards building of social housing estates by social housing organizations and consumers. The revised version of AB 92 for social housing published by the industry organization “Dansk Byggeri” does not deviate from AB 92 § 1 subs. 4. The revised version of AB 92 which is an agreed document supported by the National Consumer Council. § 5 states that “all amounts are inclusive of VAT. This does not apply to claims of liquidated damages”.
In accordance with the above it is likely to establish a standard for a claim of liquidated damages as well, especially, if the claims of liquidated damages refer to the contract sum. Obviously, the fact that claims of liquidated damage are without VAT even in consumer relations strongly supports the argument that a professional organization cannot claim VAT liquidated damages.
Clearly, the industrial standards support an argument that the obligation to present a Guarantee does not include an obligation to guarantee VAT.
15.4. Purpose interpretation
Purpose interpretation is a method of interpretation of contracts, where one primarily considers the purpose of the term in dispute rather than the exact wording of the disputed term, by considering analyses of the statements, correspondence and other contributions from the parties.
The Arbitration Court is especially known for being eager to reach a ruling that suits both parties and finding a fair solution, which means that an argument that a given interpretation supports the purpose of the contract is likely to find sympathy with the Arbitration Court. The judges ruling the case are accustomed to rise above the matter and look upon the purpose of the Guarantee.
As described above, claims of liquidated damages are likely to be seen as a deduction of the contract sum, and it therefore reduces the VAT payment of the contract rather than increases it. This is different from a claim regarding defects, as a defect will often lead to a need to carry out the work twice with the consequence that VAT has to be paid once more.
15.5 Case law
For the sake of completeness, it should be mentioned that I have searched for case law regarding the question of the obligation to secure payment of VAT when presenting a performance bond regarding a claim for liquidated damages. This search has not led to any relevant findings of case law concerning AB 92/ABT 93.
However, older case law regarding AB 72 supports the statements in the preliminary report no. 1246 that excluding VAT was the industrial practice even under AB 72. See e.g. KFE 1978.175 VBA a ruling from the Arbitration Court stating that “after usual industrial practice it is found that a claim of liquidated damages is without the addition of VAT”. Torsten Iversen refers to other older rulings in his above-mentioned book “Entrepriseretten” (Construction Law) on page 499.
It is a just assumption that the lack of case law diverts partly from the fact that most disputes as described under “description of Danish regulations on claims of liquidated damages”, are normally dealt with when settling the final account with the consequence that there is no VAT issue, partly from the fact that the matter is dealt with in the gene