International Law Office, November 19, 2012
Inna Prygova, Attorney of Capital Legal Services

Contractor's obligations

It often happens that a contractor has carried out work that is not fully compliant with the contractor's agreement or that is of low quality, but insists on transferring the work to the client.

As a general rule, [1] if the client accepts the work without an inspection, it has no right to refer to defects in the work which could have been revealed in the ordinary course of acceptance (evident defects).

Pursuant to Article 753 of the Civil Code, a client that is notified of the work under a contractor agreement for construction work or, if so provided by the agreement, under a completed stage that is ready to be transferred, must start the acceptance procedure immediately. The responsibility of arranging the acceptance rests with the client, unless otherwise provided by the agreement.

Therefore, the acceptance of work is both the client's statutory responsibility and a contractual obligation assumed by the client when the agreement is signed.

If the client is happy to accept the performed work, it signs an acceptance act, which serves as grounds for paying for the work performed under the contractor agreement.

Requirements relating to the quality of the performed work may be set down in the contractor agreement, including by referring to an appendix. In the event that a discrepancy is revealed between the work and the requirements in the agreement, the client may, at its own discretion:

• ask the contractor to resolve defects at no charge within a reasonable timeframe;

• reduce the cost of the work on a pro rata basis; or

• receive compensation for the expenses in resolving the defects, if it has such a right under the contractor agreement [2].

Requirements relating to the quality of work may also be set by laws or other legislative acts. A contractor is liable for failure to comply with such acts not only to the client, but also to the respective authorities representing the government.

Dealing with defects

What should the client do if the work is inconsistent with the requirements of the agreement? What happens to the client's obligation to accept the work?

As established by civil law,[3] unilateral refusal to perform an obligation and unilateral amendment of its conditions are not allowed, unless otherwise provided by the law. For instance, Article 753 of the Civil Code contains an exception that the client is entitled to refuse to accept the work if it reveals defects that rule out the possibility of using the work for purposes specified in the contractor agreement and that cannot be resolved by the contractor or the client.[4]
The client is entitled to refuse the work only in the event of material (substantial) defects. Other defects in the constructed facility which are not considered material do not prevent acceptance.

At present, the legislation does not classify defects in the work precisely. Rather, it appears that defects may be classified by:

• the type of violation and its effect on the use of the work (material, immaterial or minor);

• whether the client or other parties transferring and accepting the work were aware of defects (revealed or undetected);

• whether the defects are obvious, open or discreet in the ordinary course of accepting the work (evident or latent); or

• whether they can be resolved (curable or non-curable). Such types of defect can exist both simultaneously and separately.

In the event of a dispute between the client and the contractor, the type of defect will be determined by the court based on an expert opinion.
As it is sometimes difficult to determine whether the defects are material when the work is accepted, the client must notify the contractor immediately if, in the course of accepting the work, it is revealed that the work does not comply with the agreement in a way which negatively affects the work, or there are other work defects [5].

It is important to comply with the procedure for such notice. It must be executed in writing and its delivery to the contractor must be documented (eg, a copy of the claim with a receipt confirmation by an authorised representative of the contractor, a mailing receipt or a return receipt). The notice or claim must contain the list of revealed work defects specifying the nature of the quality violation in the performed work. Furthermore, the client must invite the contractor to inspect the improperly performed work and request the contractor to resolve the defects by its own means at no cost and within a particular timeframe. If the contractor fails to fulfil its obligation to resolve the defects within the timeframe, the client can request the contractor to compensate it for the cost of resolving the defects, provided that the client's right to resolve the defects is set forth in the contractor agreement.[6]

If the client's refusal to accept the work is not executed correctly, the contractor is likely to sign the act unilaterally; the act will have the same effect as a bilateral act unless a court declares it null and void.[7]

Inactivity on the part of the client may result in rather unfavourable consequences. For example, pursuant to Article 720(2) of the Civil Code, a client that discovers defects during its acceptance of work is entitled to refer to them, provided that the document confirming the acceptance mentions such defects or the possibility of subsequently filing a claim to resolve them.

The regulations suggest that the absence of a document confirming the existence of defects and the failure to give the contractor timely notification of the defects deprive the client of the right to request resolution of the defects. Moreover, it makes it considerably more difficult to substantiate the reasons for refusing to accept work in court. This is confirmed by court practice, in particular the decision of the Moscow Commercial Arbitration Court in Case А40-33558/09-104-33 and the decree of the Federal Commercial Court of Moscow Circuit in the same case, and the decree of the Federal Commercial Court of Moscow Circuit in Case А40-112523/11-89-773.[8]

Comment

In light of the above, the following points should be noted:

• After receiving notice from the contractor that it is ready to transfer the work, the client must accept the work. If defects are revealed that prevent the use of the work for the purposes specified in the contractor agreement, and such defects cannot be resolved by the contractor or the client, the client is entitled to refuse to accept the performed work.

• If the client discovers defects in the work in the course of accepting it, it must notify the contractor of this in writing immediately and obtain confirmation of delivery of such notice in case of a subsequent court examination.

• If the work was performed with defects and the contractor refuses to resolve them and requests payment, the parties may carry out an inspection of the work and determine the cost of resolving the defects. The cost of an expert's services may be credited toward the payment for performed work.

Therefore, while acting under the law and within general business practices, the client can avoid the significant time and financial costs involved in disputes with contractors over the quality and scope of performed work.

Endnotes

[1] Article 720(3) of the Civil Code.
[2] Article 723(1) of the Civil Code.
[3] Articles 309 and 310 of the Civil Code.
[4] Clause 6 Article 753 of the Civil Code.
[5] Article 720 of the Civil Code.
[6] Clause 1 Article 723 of the Civil Code.
[7] Clause 4 Article 753 of the Civil Code.
[8] Other relevant cases include:

• Decree of the Federal Commercial Arbitration Court of North-Caucasus Circuit in Case А56-11236/2008, April 1 2012;

• Decree 09AP-14576/2010 of the Ninth Commercial Arbitration Court of Appeal, July 20 2010;

• Decree F09-5682/10-S2 of the Federal Commercial Arbitration Court of Ural Circuit, July 21 2010;

• Decree А56-6603/2008 of the Federal Commercial Arbitration Court of North-Western Circuit, May 4 2010; and

• Decree А56-12924/2009 of the Federal Commercial Arbitration Court of North-Western Circuit, January 25 2010.