Inna Prygova, Attorney of Capital Legal Services

According to the general rule of Clause 1 Article 452 of the Civil Code of the Russian Federation (hereinafter the “Civil Code”), the agreement on contract termination is to be signed in form similar to that of the contract, except as otherwise provided in the law, other legal acts, the contract or business practice. Moreover, provisions of Clauses 1 and 3 Article 450 of the Civil Code allow recognizing the agreement on contract termination as reached, provided it envisages the events of unilateral (out-of-court) repudiation, and one of the parties exercised this right by providing the other party with a written notification of contract repudiation.

If the parties failed to reach an agreement, either of them is entitled to file a court claim on contract termination. Pursuant to Clause 2 Article 452 of the Civil Code, the claim on contract termination may be filed with the court only after receiving the other party’s refusal of the proposal to terminate the contract or failure to receive such response within the timeframe specified in the proposal or established by law, and within 30 days if such timeframe is not designated. If the requirement set forth in Clause 2 Article 452 of the Civil Code is not fulfilled, the claim on contract termination is to be dismissed by the court.

This article will cover the cases when a client files a claim with the court on contract agreement termination due to the contractor’s violation of timeframes for performing works.

According to the general rule of Clause 2 Article 450 of the Civil Code, the contract may be terminated by the court upon request of either party only in the event of material violation of the agreement by the other party. Such violation that results in damages for the other party, as a result of which it is significantly deprived of what it was entitled to count on when signing the contractor agreement, is considered material. Pursuant to Clause 1 Article 708 and Clause 1 Article 766 of the Civil Code, initial timeframes and deadlines for performing works are material conditions of the contractor agreement; therefore, absence of such provisions in the contractor agreement indicates that it was not entered into (Clause 1 Article 432 of the Civil Code). A similar position is described in Decree No.VAS-3087/10 of the Supreme Commercial Arbitration Court of Russia dated March 19, 2010. Moreover, pursuant to Clause 1 Article 708 of the Civil Code, the parties are entitled to provide for interim timeframes for performing works in the contractor agreement, which are also recognized as a material provision of the contractor agreement.

Since the provisions on timeframes for performing works are classified as material provisions of a contractor agreement by law, if they are violated, the relations between the parties to the contractor agreement are to be governed by special regulations [1].

Termination of contractor agreement under Clause 3 Article 708 of the Civil Code

Pursuant to Clause 3 Article 708 of the Civil Code, in the event the contractor violates the deadline for performing works or other timeframes established by the contractor agreement, the client is entitled to refuse to accept the work results and to request compensation of damages, if due to the contractor’s delay the client is no longer interested in the work results. Based on the analysis of the indicated regulation, a conclusion can be made that a bad faith contractor is held liable under Clause 3 Article 708 of the Civil Code only if he violated the deadline for performing works. And on the contrary, when the contractor violates only the initial and/or the interim timeframes, but not the deadline for performing works, the client’s court claim on terminating the contractor agreement should be dismissed. In the event the contractor meets the deadline for performing works, it is not held liable under Clause 3 Article 708 of the Civil Code. Commercial arbitration courts adhere to this particular legal position [2].

Since the contractor may be held liable under Clause 3 Article 708 of the Civil Code only due to violation of the deadline for performing works, the client can refuse to accept work results only once the deadline has expired. As Clause 2 Article 405 of the Civil Code suggests, such refusal may be expressed by the client only prior to accepting work results from the contractor. After accepting performed works from the contractor, the client may not repudiate the contractor agreement and is obliged to pay for performed and accepted works [3].

It appears that the contractor is also held liable under Clause 3 Article 708 of the Civil Code in the event of non-material violation of the deadline for performing works.

In order to impose liability on the contractor under Clause 3 Article 708 of the Civil Code the client needs to be no longer interested in the work results, besides contractor’s violation of the deadline for performing works. In the event the contractor fails to perform works by the deadline, the client only needs to declare lack of interest in the work results. The reasons of the client’s lack of interest should have no legal meaning either for the contractor, or for the court, since the sole grounds for a creditor’s refusal to accept results under Clause 2 Article 405 of the Civil Code is if the debtor is in arrears. The creditor’s refusal to accept results is only substantiated in the absence of the creditor’s delay [4].

As a rule, commercial arbitration courts do not request that the client provide proof of its lack of interest in work results. At the same time, court practice also contains other examples. The Decree of the Federal Commercial Arbitration Court for the North Caucasus Circuit dated September 04, 2009, on case No.A32-11106/2008-20/288, which dismissed the client’s claim to terminate the agreement, contains grounds for refusal – actual transfer of works result to the client and failure to provide “proof that performance of contractor agreement dated February 13, 2008 became of no interest for the client (i.e. the client no longer needed the disputed documentation) and that lack of interest was caused particularly by the failure to perform work within the timeframe stipulated in the contractor agreement.”

Thus, absence of proof that the client is not interested in work results or the contractor’s failure to contest the client’s arguments concerning lack of interest in work result are none other than bad faith behavior of a party to the contractor agreement.

Termination of contractor agreement under Clause 2 Article 715 of the Civil Code

In the event the contractor fails to start performing the contractor agreement in due time or carries out the works so slowly that it clearly becomes impossible to finish the works in time, the client may repudiate the agreement and claim damages under Clause 2 Article 715 of the Civil Code. Under this rule the client may request termination of the agreement before expiry of the timeframe for performing the works (Clause 3 Article 708 of the Civil Code) but the court may satisfy the client’s request for termination of the agreement under Clause 2 Article 715 of the Civil Code only provided the client is able to prove that the contractor was obviously unable to finish the works in time.

In substantiation of its position the client may provide the court with certificates drawn up by the client or a third party when inspecting the status and quality of the works carried out by the contractor [5].  Probative value of such certificates will increase if they are signed by the contractor. If there is the concern that the contractor may refuse to sign the inspection certificate or could fail to appear, it is reasonable for the client to send the contractor in advance a telegram proposing to participate in the inspection of status and quality of works. It is also useful to engage a specialist (an expert) in inspecting the works and making photos of the inspection results.

Correspondence between the parties is rather essential for cases of such nature. If it follows from the correspondence that the claims were made to contractor due to repeated breaches of timeframes for performing the works, which were ignored, it becomes easier for the client to prove its case in court [6].

In the event the contactor breaches initial and/or interim timeframes for performing the works, the client may face difficulties in substantiating its claim on termination of the agreement under Clause 2 Article 715 of the Civil Code. If it is evident from the contractor’s work pace that the works will be finished by the contractor in time, the client is deprived of legal grounds for terminating the contractor agreement under Clause 2 Article 715 of the Civil Code [7]. 

Relief of the contractor from liability for breaching timeframes for performing works

In terms of Clause 3 Article 401 of the Civil Code, the contractor is liable for breaching the timeframes for performing the works, irrespective of whether such breach was its fault, unless it is able to prove that the proper fulfillment of obligations was impossible due to force majeure events. However, Clause 3 Article 405 and Clause 2 Article 328 of the Civil Code provide for relief for the debtor from liability to the lender for a delay in fulfilling the obligation, provided the debtor proves that its default results from the lender’s delay. The most likely protection of the contractor against a claim for termination of the contractor agreement would be to file objections and to state that the breach of timeframes for performance of works was committed due to the client’s fault. In particular, the contractor may file the following objections against the claim:

(i) The client failed to fulfill the obligations imposed by the contractor agreement and listed in Article 719 of the Civil Code: it failed to provide materials, equipment, technical documentation or item to be processed/handled. In such event the contractor is entitled not to start the works or to suspend the works already started, provided the breaches committed by the client prevent the contractor from performing the agreement or there are circumstances clearly demonstrating that such obligations cannot be fulfilled within the established timeframe.

(ii) The client failed to fulfill the obligation on providing technical documentation as set forth by the contractor agreement [8].  

(iii) The client failed to provide the contractor in time with the land plot for construction purposes [9].  

(iv) The client failed to fulfill obligations imposed by the contractor agreement on providing the contractor with buildings and structures required for performing the works, on transporting cargo to the contractor, on installing a temporary power supply, water supply or steam pipeline networks, and on rendering other services [10].

(v) The client failed to fulfill the obligation on cooperation between the parties under the contractor agreement as established by Article 750 of the Civil Code. For instance, the client’s default led to the contractor’s delay in delivering the result of works and therefore the court dismissed the client’s claim filed against the contractor on collecting a penalty for the delay in performing the works [11].  

Legal consequences of termination of contractor agreement by court

I. The agreement is terminated under a court resolution. Therefore, it is deemed terminated starting from the time the court resolution adopted on the case enters into effect [12].

II. Pursuant to Clause 2 Article 453 of the Civil Code, termination of the agreement leads to termination of the parties’ obligations set forth by such terminated agreement. According to Clause 4 of this Article the parties are not entitled to compensation for the works they have performed prior to the termination, unless otherwise is provided by the law or agreement between the parties. In terms of Articles 720 and 753 of the Civil Code, the contractor’s obligation is deemed fulfilled starting from the time the client accepts the results of works. Therefore, termination of the contract also entails termination of the contractor’s legal grounds for using the advance payment received from the client. By virtue of Article 1102 of the Civil Code, the contractor must return the advance payment to the client after the court resolution on termination of the agreement enters into effect. In the event the works have been partially performed by the contractor and accepted by the client, the issue in question is to be resolved differently. By virtue of Clause 729 of the Civil Code, in the event the works partially performed by the contractor are accepted by the client, the latter must pay for such works, and the contractor is entitled to withhold the cost of such works from the advance payment or, if the advance payment amount is not sufficient, request that the client pay the outstanding debt.

III. In the event a material breach by the contractor of the terms and conditions of the agreement served as grounds for termination, the client is entitled to claim damages caused by termination of the agreement [13] to the extent not covered by the penalty [14]. 

[1] Clause 3 Article 708 and Clause 2 Article 715 of the Civil Code.

[2] Decree No.F09-7488/09-SZ of the Federal Commercial Arbitration Court for the Ural Circuit dated October 05, 2009, on case No.A60-41403/2008-S1; Decree of the Federal Commercial Arbitration Court for the North-Western Circuit dated October 03, 2008, on case No.A66-8544/2007; Decision of the Commercial Arbitration Court of Moscow dated June 01, 2006, on case No.A40-12094/06-1-98.

[3] Decree of the Federal Commercial Arbitration Court for the North-Western Circuit dated October 16, 2006, on case No.A56-9047/2005.

[4] Clause 3 Article 405 of the Civil Code.

[5] Clause 1 Article 715 of the Civil Code.

[6] Resolution of the Federal Commercial Arbitration Court for North-Western Circuit dated October 20, 2009 on case No.А56-46740/2006.

[7] Resolution of the Federal Commercial Arbitration Court for Volgo-Vyatsky Circuit dated May 17, 2006 on case No.А82-1815/2005-7
[8] Article 743 of the Civil Code
[9] Clause 1 Article 747 of the Civil Code
[10] Clause 2 Article 747 of the Civil Code
[11] Clause 17 of the Informational Letter No.51 of the Presidium of the Supreme Commercial Arbitration Court of the Russian Federation “Review of dispute resolution practice as pertains to the contractor agreement” dated January 24, 2000, Resolution of the Ninth Commercial Arbitration Court of Appeal dated July 15, 2008 on case No.А40-3139/08-29-33.
[12] Clause 3 Article 445 of the Civil Code
[13] Clause 5 Article 453 of the Civil Code
[14] Clause 1 Article 394 of the Civil Code