Date: 20/11/2009
Applicant: Nile Insurance S.C.
Respondent: Tigray Regional State Construction and Road Transport Office

Background:

 The case originated in the Tigray Regional Court and was heard by the Federal High Court. The dispute was over a construction contract for the West Zone High Court building, with a total cost of Birr 3,752,572.84. The contractor, Ato Mengesha Kinfu, received advance payments and guarantees from Nile Insurance, the applicant.

The contractor received advance payment of Birr 636,088.40 and a performance bond of Birr 374,169.96.

Due to delays and failure to meet deadlines, the respondent terminated the contract, incurring additional costs of Birr 895,294.44, which they sought to recover from the contractor and the applicant.

The lower court ruled in favor of the respondent, and the applicant appealed to the Federal Supreme Court, which ordered an expert evaluation of the remaining construction work.

Expert Findings:

The contractor had completed work worth Birr 984,253.27, using the full advance payment of Birr 980,551.24, plus Birr 3,722.03 from personal funds.

Rulings:

The applicant was held liable for Birr 140,813.72 in additional construction costs.

The liability was shared between the applicant and the contractor for Birr 486,949.85 in damages.

The court clarified that the applicant’s guarantee was only for the contractor’s performance, not for VAT or other liabilities.

The advance payment was fully utilized by the contractor, meaning the applicant was not liable for repayment under the advance payment bond.

The applicant's liability was limited to the performance bond of Birr 374,169.96.

Decision:

 The court concluded that the applicant was not responsible for VAT or additional liabilities not covered by the bond. The applicant was only liable for the performance bond amount of Birr 374,169.96 and not for the full damages claimed by the respondent.

While the contractor’s completion of construction work beyond the advance and first payments received from the respondent does not prevent the respondent from filing a lawsuit to recover the advance payment, it also does not bar the respondent from seeking compensation for damages caused by the contractor’s failure to fulfill his obligations under the construction contract. The contract was terminated due to the contractor’s fault, and the respondent is entitled to hold the applicant liable for the performance bond of Birr 374,269.59 (three hundred seventy-four thousand two hundred sixty-nine Birr and fifty-nine cents) issued under number P.O.B. /151/ 0708. Based on the audit of the dispute, it has been established that the contract was terminated due to the contractor’s (the first defendant) fault, for which the applicant had provided the performance bond. As outlined in Articles 1790 and 1791 of the Civil Code, the employer (the respondent) is liable to be compensated for losses incurred due to the termination of the construction contract. Additionally, Sub-Article 2 and subsequent provisions of Article 3292 of the Civil Code further support the respondent’s claim for compensation for the losses suffered as a result of the contractor’s non-performance and the contract’s termination due to the contractor’s fault.

The employer provides the advance payment to the contractor to facilitate the commencement of construction work. This payment is intended to enable the contractor to procure construction materials, labor, and other necessary resources, as well as to reimburse the employer for the work completed. Essentially, the advance payment is made to ensure the contractor can fully utilize the funds for the project and initiate and complete the construction work. The applicant is responsible for ensuring that the advance payment guarantee is used solely for the construction work. Furthermore, the applicant is jointly and severally liable with the contractor for any portion of the advance payment received by the contractor that is used for purposes other than the construction work.