How to settle the contractor's claims after withdrawal from the work contract?
Articles that focus on the issue of withdrawal from a work contract usually focus their attention on the assessment of the reasonableness of the withdrawal, i.e. the assessment of whether all the statutory or contractual prerequisites for withdrawal have been met. What is often overlooked, however, are the subsequent mutual rights and obligations of the client and the contractor arising after a justified withdrawal.
So what claims do the client and the contractor have against each other and what considerations will the court follow in settling them? This is the focus of this article.
Author of the article: ARROWS (JUDr. Lukáš Dořičák, LL.M., MBA, office@arws.cz, +420 245 007 740)
The general basis for the withdrawal from a contract (not only) for work is Section 2005 of Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter referred to as the "Civil Code"), according to which the withdrawal from the contract terminates the rights and obligations of the parties to the extent of its effects. In accordance with Section 2004(1) of the Civil Code, the rights and obligations of the contractor and the client are extinguished from the outset.
Rights and obligations after withdrawal from the contract
If one of the parties has already performed according to the work contract and there is a withdrawal, then this party has the right to return what it has performed and the other party is obliged to return this performance. If, for example, the client has already made a deposit and the work contract is cancelled without the contractor having started the agreed work, the contractor is obliged to return the deposit made 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 the house, the client has already paid the deposit), then each party has the right to demand the return of what it has performed (Section 2993 of the Civil Code), and the other party is obliged to return the performance.
To deliver or not to deliver? That's what this is all about
In practice, however, it is not uncommon to encounter a situation where it is not possible to deliver the performance that is demanded. If, for example, the contractor is obliged to deliver the performance it has performed in the form of the constructed foundations of a house, it may be considered that it is not well possible to deliver the performance.
In assessing whether or not it is possible to return the performance, the consequences of returning the performance in terms of economy must be considered in particular. The return of the transaction should therefore not lead to:
(i) the depreciation or even destruction of an item which might otherwise serve its purpose where it is placed ( incorporated),
(ii) the additional cost of dismantling the returned item.1
When does a claim for monetary compensation arise?
If the client withdraws from the work contract, e.g. due to a delay on the part of the contractor, and the contractor has already laid the foundations of the house, which do not show defects and can be used for their purpose by another contractor who takes over the construction of the house, then it can be considered that the return of the object of performance is not well possible. If the court concludes that the return of the performance is not well possible, the contractor is entitled to monetary compensation.
What will be the amount of the compensation?
In determining the amount of monetary compensation, the main consideration is whether the contract was consideration or non- consideration. Since the work contract is conceptually a contract for consideration, the monetary compensation is primarily the amount of the consideration agreed in the contract (Art. 2999(2) of the Civil Code). Thus, if a deposit of the amount of the consideration agreed for the foundations of the house (e.g. within the budget) has been paid, then the contractor who has built the foundations free of any defects is entitled to reasonable compensation in the amount of the deposit after withdrawal from the contract.
If it is the amount of the payment that would have given rise to the withdrawal or if the amount of the payment was substantially affected by such a reason, or if, for example, a contract for work was agreed but the amount of the payment was not agreed, then the contractor would be entitled to monetary compensation after withdrawal in the amount of the normal price of the performance (the normal price of the foundations of the house), as determined, as a rule, on the basis of an expert's report. It would therefore have to be based on the price that would have been obtained by selling the performance carried out by the contractor at the place and time in question (sale of the foundations of the house).
Defective or incomplete performance? Compensation must be reasonable
In determining reasonable compensation (in the amount of the contractually agreed consideration for the performance or in an amount corresponding to the normal price of the performance), account must also be taken of any defects or incompleteness of the performance provided, if such defects or incompleteness would justify a reduction in the value of the performance (the built foundations).2 The contractor would thus be entitled to reasonable compensation corresponding to:
(i) the normal value of the foundations constructed, where, if that value were to be determined, the expert would also have to take into account the defects in those foundations; or
(ii) the contractually agreed price of the part of the work that is not readily returnable to the contractor, which price would be reduced by an amount corresponding to the client's right to a reasonable discount for defects in the foundations.
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1 Decision of the Supreme Court of 28 May 2009, Case No. 23 Cdo 2842/2007.
2 Supreme Court decision of 27 August 2014, Case No. 33 Cdo 1568/2014 and Supreme Court decision of 23 October 2018, Case No. 28 Cdo 1060/2017.