How to settle a contractor's claims after withdrawal from a work contract?

Rights and Obligations After Withdrawal from a Contract

If one of the parties has already performed under a contract for work and the contract is withdrawn from, that party has the right to the return of what it has performed, and the other party has the obligation to hand over this performance. For example, if the client has already paid a deposit and the contract for work is withdrawn from before the contractor has begun the agreed work, the contractor is obliged to return the deposit paid by the client.

If the contractor and the client have already performed for each other (e.g., the contractor has already built the foundations of a family house, and the client has already paid a deposit), then each party has the right to demand the return of what it has performed (Section 2993 of the Czech Civil Code), and the other party has the obligation to hand over the performance. 

To Return the Performance, or Not? That Is the Question

In practice, however, it is not uncommon to encounter a situation where it is not reasonably possible to return the performance that is being requested. For example, if a contractor is obliged to hand over the performance they have carried out in the form of the constructed foundations of a family house, it can be argued that it is not reasonably possible to hand over this performance. 

When assessing whether it is possible to return a performance or not, the economic consequences of returning the performance must be considered in particular. Therefore, the return of the performance should not lead to:

(i) the degradation or even destruction of an item that could otherwise serve its purpose where it is located (installed), 

(ii) further costs that would need to be incurred for the dismantling of the item being returned.

When Does a Claim for Monetary Compensation Arise?

If the client withdraws from the contract for work, for example, due to a delay on the part of the contractor, and the contractor has already laid the foundations of the family house, which show no defects and can be used for their purpose by another contractor who takes over the construction of the family house, then it can be concluded that the return of the subject of performance is not reasonably possible. If a court concludes that the return of the performance is not reasonably possible, the contractor is entitled to monetary compensation.

What Will Be the Amount of Compensation?

When determining the amount of monetary compensation, it is necessary to consider primarily whether the contract was for consideration or gratuitous. Since a contract for work is by definition for consideration, monetary compensation is primarily provided in the amount of the relevant price agreed in the contract (Section 2999(2) of the Czech Civil Code). Therefore, if a deposit was paid in the amount of the price agreed for the foundations of the family house (e.g., as part of the budget), then the contractor who built the foundations free of any defects is entitled to reasonable compensation in the amount corresponding to the deposit after withdrawal from the contract.

If the amount of the price itself was the reason for withdrawal from the contract, or if the amount of the price was substantially influenced by such a reason, or if, for example, a contract for work was agreed but the price was not, then after withdrawal from the contract, the contractor would be entitled to monetary compensation in the amount of the market price of the performance provided (the market price for the constructed foundations of the family house), usually determined on the basis of an expert report. It would therefore be necessary to base it on the price that would have been achieved by selling this performance carried out by the contractor at the given place and time (by selling the foundations of the family house).

Defective or Incomplete Performance? Compensation Must Be Reasonable

When determining reasonable compensation (in the amount of the price for the performance agreed in the contract or in the amount corresponding to the market price of the performance), it is also necessary to take into account any defectiveness or incompleteness of the performance provided, if such defectiveness or incompleteness would justify a reduction in the value of the performance (the constructed foundations).

Depending on the circumstances, the contractor would thus be entitled to reasonable compensation after withdrawal from the contract corresponding to:

(i) the market price of the constructed foundations, where in determining this price, the expert would also have to take into account the defects of these foundations, or

(ii) the price agreed in the contract for the completed part of the work that is not reasonably possible to return to the contractor, where this price would be reduced by an amount corresponding to the client's claim for a reasonable discount due to the defectiveness of the completed foundations.

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