International Law Office, August 13, 2012
Inna Prygova, Attorney of Capital Legal Services

The federal government determines the circumstances in which a contractor has the right not to commence works, or to suspend works that it has already commenced, on the grounds that its client has failed to fulfill its counter-obligations under the agreement. Further to Article 719(1) of the Civil Code, this right arises where:

• the client fails to provide materials, equipment, technical documentation or an item to be processed, thus preventing the contractor from performing its obligations under the agreement; or

• it is clear in the circumstances that the client will fail to perform such obligations within a stipulated timeframe.

This provision is based on the general regulation on the mutual performance of obligations by the parties, whereby the agreement is conditional on the counterparty's performance of its obligations [1].

The practical application of the provisions of Article 719 presupposes a number of mandatory actions on the part of the contractor. A contracting agreement typically requires the client to supply the contractor with initial data for design work, design documentation or working documentation to perform works, any necessary authorisations and certain equipment, as well as to ensure that the construction site meets certain specified requirements. Notwithstanding this, the contractor often continues to discuss these issues with the client. In an effort to meet the deadline stipulated in the agreement, a contractor will often neither notify the client in writing of the latter's failure to perform its obligations, nor suspend the works, relying on the promise to hand over everything necessary 'in due course'.

A systematic analysis of the standards imposed by Articles 716 and 719 of the code, and of court practice in relation to the application of these standards, invites a conclusion about their application between parties to a construction contract. The contractor's right to suspend work is conditional on its own obligation to warn the client immediately and to suspend work - before receiving orders from the client - if it becomes aware of:

• material, equipment or technical documentation provided by the client or an item to be processed that is of poor quality or is otherwise unfit for purpose;

• potentially adverse consequences of the client's orders regarding the method in which the work is to be performed; or

• other circumstances that do not depend on the contractor and either jeopardise the suitability or sustainability of the results of the work or make it impossible to complete the required work on time [2].

In order to exercise its right to suspend work pursuant to the provisions of Article 719, and in the event that the client fails to carry out its obligations under the agreement, the contractor should write to the client:

• requesting that the client supply the documentation or equipment.or implement the required condition (eg, by ensuring that the construction site meets certain requirements) as it has so far failed to do within the stipulated timeframe;

• notifying the client of the circumstances set forth in Article 716(1) of the Civil Code; and

• notifying the client of its delay in meeting the deadline for commencing work or of its decision to suspend work, preferably accompanied by a proposal to sign an agreement on the suspension of work.

In all cases, the contractor must ensure that it has evidence that the client was duly notified. It should retain the mailing receipt and a list of enclosures, with an officially stamped proof of postage from the post office. Alternatively, it should obtain a signature from the client's authorised representative (preferably, a manager acting without power of attorney), endorsed with the company seal. This approach is reflected in a number of
court decisions [3].

Compliance with these regulations and practical steps will enable a contractor to provide relevant evidence in court in the event of a dispute being litigated, and will also provide a basis on which to exercise its right under Articles 716(3) and 719(2) to repudiate the agreement and seek compensation for losses.

Endnotes

[1] Article 328(1) of the Civil Code.
[2] See Article 716(1).
[3] See, among others, Decision KG-А40/8639-07 of the Federal Commercial Arbitrazh Court for the Moscow Region, September 10 2007; Decisions А55-11808/2008 and А55-2848/2011of the Federal Commercial Arbitrazh Court for the Povolzhsky Circuit, April 29 2010 and December 5 2011, respectively; Decision А74-2016/2011 of the Federal Commercial Arbitrazh Court for the East Siberian Circuit, March 11 2012; Resolutions VAS-4197/09, VAS-5214/09 and VAS-3814/10 of the Supreme Commercial Arbitrazh Court, April 23 2009, June 18 2009 and April 15 2010, respec; Decision KG-А40/10623-10 of the Federal Commercial Arbitrazh Court for the Moscow Region, September 22 2010; Decisions А56-60625/2010, А56-39927/2009 and А56-2680/2010 of the Federal Commercial Arbitrazh Court for the Northwestern Circuit, June 9 2011, October 11 2010 and November 26 2010; Decisions А35-2844/07-S5 and А23-2109/2011 of the Federal Commercial Arbitrazh Court for the Central Circuit, August 6 2010 and March 11 2012.