By judgment with case file number 25000-23-36-000-2019-00186-01, Subsection A of the Third Section of the Administrative Litigation Chamber of the Council of State (the "CE" by its acronym in Spanish) ruled on an appeal filed by a temporary joint venture, contractor of a state entity and policyholder of a performance bond with work stability coverage, and the insurer that issued the insurance.
Facts:
In 2011, the temporary joint venture executed a public works contract with the state entity for the rehabilitation of a road and obtained a performance bond with work stability coverage to protect the contracting entity.
In 2015, the Office of the Comptroller General of the Republic conducted an audit and identified structural failures in the asphalt, retaining walls, and other elements of the road. Based on these findings, in 2016, the contracting entity declared the occurrence of the loss and ordered the insurer to pay the indemnity under the work stability coverage of the performance bond.
Discontented with the administrative act declaring the occurrence of the loss, the insurer and the contractor sought the annulment of the act, arguing that (i) the causes of the loss were not attributable to the contractor; (ii) an exclusion of the insurance applied, exempting the insurer from payment due to "improper or inadequate use, or lack of preventive maintenance under the responsibility of the contracting entity"; and (iii) the calculation made by the contracting entity to estimate the indemnification amount lacked technical support.
Procedural history:
The Third Section of the Administrative Tribunal of Cundinamarca denied the claims of the lawsuit and upheld the validity of the administrative act declaring the loss. The Tribunal stated that it had been proven that (i) the defects in the work were attributable to the contractor due to construction deficiencies; and (ii) the insurance exclusion had not been established. The insurer and the contractor appealed this decision before the CE, which upheld the first-instance ruling based on the following:
Considerations:
- The contractor is liable for the stability of the work:
To determine whether the contractor had failed to comply with its obligations, the CE analyzed the obligations arising from the construction contract, particularly those established in Article 2060 of the Colombian Civil Code. It noted that such contracts impose ancillary safety obligations on the builder, meaning that the contractor is liable for hidden defects or flaws that appear within the warranty period.
It further indicated that these post-contractual obligations of the contractor regarding defects constitute obligations of result.
"Thus, this Decision Chamber has considered that in cases where the dispute revolves around the stability of the work, the issue is not the breach of the main construction obligation, but rather the ancillary obligation to ensure that the result fulfills the purpose for which the work was contracted and does not pose a risk of total or partial ruin, in order to protect the creditor’s assets, which suffer harm due to the defective or delayed execution of the contractual obligations."
(...)
"Although it is true that in the final settlement of the contract, whether by mutual agreement of the parties or by unilateral decision of the administration, the legal relationships between the parties are usually extinguished, it is also true that certain obligations remain binding on the contractor, who, despite having delivered the work, the services, or the goods under the contract, remains liable even after settlement for defects or flaws that may appear during the warranty period or for latent defects within the period established by law (Art. 2060 C.C.)."
(...)
"The contractor is obliged to remedy defects in the work it executed when such defects are inherent to its construction and compromise its stability. This is a post-contractual obligation that can be covered by the insurance policies required for such purposes. Thus, by the nature of the contract, the contractor assumes an obligation of result, which consists of delivering stable work capable of providing the service for which it was conceived."
- The exclusion for lack of maintenance and improper use was not set:
The insurer argued that the deterioration of the road was due to the lack of preventive maintenance and the passage of heavy vehicles, invoking the coverage exclusion for "improper or inadequate use, or lack of preventive maintenance by the contracting entity." However, the CE rejected these arguments after verifying that the contracting entity had indeed carried out maintenance work and that heavy vehicle traffic had been restricted. Additionally, the insurer failed to demonstrate that these were the direct causes of the damage.
"From the above, it is established that the [Contracting Entity], through the referenced agreements, carried out maintenance work on the road (...) immediately after the execution of the contract No. 602 of 2011, whose final acceptance certificate was signed on January 20, 2013. Additionally, it was identified that the locations where subsequent activities were carried out coincided, in some sections, with the points where the Comptroller's Office identified deficiencies in the construction process."
(...)
"However, the insurer did not demonstrate that the work had been subject to improper or different use from what was originally developed, which would have triggered the exclusion cause under the coverage. Moreover, it was also proven that, following the recommendations of the contracting entity, the Secretariat of Transport and Mobility of Cundinamarca restricted the passage of heavy vehicles on the road. Therefore, [the Insurer] cannot disregard its obligations as guarantor of the contract based on these allegations, which were not proven in this case."
- The indemnification calculation was not arbitrary:
Finally, the CE concluded that the contracting entity had not made an arbitrary indemnification calculation; on the contrary, it was based on technical reports and a pricing manual used for such matters.
"Thus, the Chamber considers that the assessment of damages carried out by the [Contracting Entity] was based on the technical reports prepared by the contract's supervising authority, which, according to the evidence collected in the administrative proceedings, identified the necessary activities for repairs and, based on the ICCU price manual for the year 2016, calculated the repair costs.
Furthermore, the damage assessment was based on repair costs for 2016 and, in any case, did not exceed the coverage limit for work stability, which guaranteed damages up to a maximum amount of COP $3,158,406,246."
If you wish to consult the judgment with case file number 25000-23-36-000-2019-00186-01 dated February 7, 2025, click here.