Unscrupulous construction customer: what should a contractor do?

Author: Vladyslav Firsov, attorney at law, senior associate, Yurydychna Gazeta.

Civil law protects the legitimate and justified interests of all parties to a contract. Such protection is provided both at the level of substantive rules of law and the principles of civil law and contractual relations, as well as at the level of judicial practice.

One of the most common and, in our experience, the most complex practices of contractual dispute resolution is the practice of construction contracts. On the one hand, the provisions of Chapters 53 and 61 of the Civil Code of Ukraine contain instructions that allow the parties to settle disputed legal relations or determine the behavior in case of bad faith performance of their obligations by the other party. On the other hand, different levels of understanding and interpretation of a dispute, established court practice and the human factor make the practical implementation of the provisions of the Civil Code of Ukraine not as obvious and simple as it seems at first glance when reading the relevant legal provisions.

Our practice suggests that it is much easier to terminate the contract at the initiative of the customer than at the initiative of the contractor. The customer can always withdraw from the contract at any time (however, such a decision does not relieve the customer from paying the cost of the work actually performed). In addition, even the court practice of terminating a contractor agreement at the initiative of the employer and in connection with the contractor's failure to fulfill its obligations is more stable and orderly.

At the same time, the situation is much more complicated when the contractor, realizing that it is impossible to fulfill the contract due to the behavior of the employer, wishes to terminate the contract. In this article, we will analyze the situation when the contractor's actions are solely in good faith. We will not take into account situations where the contractor breaches its obligations intentionally or has been dishonest, although we will make a reservation that quite often dishonest contractors hide their dishonesty behind the screen of "decent" instruments, which will be discussed below.

What does the law say?

The Civil Code of Ukraine contains both general and special rules that entitle the contractor to choose options for behavior in the event of a violation of its rights by the customer and the inability to perform the work through the fault of the customer.

In particular, Art. 651 of the Civil Code of Ukraine contains general rules that are the same for both the employer and the contractor. Thus, the parties may establish the procedure and conditions for unilateral withdrawal from the contract in the text of the contract itself. This case is the easiest for the contractor. Therefore, in order to protect your interests, we advise you to take a responsible approach to the procedure for drafting and approving the text of the contract before entering into it.

But what should the contractor do if the contract does not provide for his right to unilaterally withdraw from the contract? The same Article 651 of the Civil Code of Ukraine provides that any party has the right to apply to the court for termination of the contract if the other party has materially breached the contract.

In this case, such a breach of contract by a party is deemed to be material if, as a result of the damage caused by this breach, the other party is largely deprived of what it expected when entering into the contract.

In addition to the general rules, the Civil Code of Ukraine contains special provisions provided for in a special Chapter 61 entitled "Contract". In particular, Art. 848 of the Civil Code of Ukraine stipulates that the contractor has the right to withdraw from the contract and demand compensation from the customer if the following conditions are met:

1) the contractor has timely notified the customer of the need to replace the defective or unsuitable material, change the instructions on how to perform the work or eliminate other circumstances;

2) the respective defective materials, instructions and circumstances threaten the quality or suitability of the work result;

3) the employer has failed to comply with the contractor's request for appropriate substitution or elimination of circumstances that prevent the contractor from performing the work properly.

In addition to the contractor's right to withdraw from the contract if the material or instructions provided by the employer threaten the quality of the work, Article 848 of the Civil Code of Ukraine also provides for the contractor's obligation to withdraw from the contract if the use of substandard or unsuitable material or compliance with the employer's instructions threatens human life and health or leads to violation of environmental, sanitary, safety and other requirements.

Please note that Art. 847 of the Civil Code of Ukraine expressly provides for the contractor's obligation to notify the customer in advance of the following circumstances:

1) about the poor quality or unsuitability of the materials provided;

2) the fact that the customer's instructions threaten the quality of the work or will lead to the unusability of the work result;

3) the existence of other circumstances beyond the contractor's control that threaten the quality or suitability of the work result.

Thus, the contractor's right to terminate the contract due to the client's bad faith or other faulty actions is not absolute and depends on the contractor's fulfillment of its obligation to timely notify the client of the above-mentioned obstacles to the quality of the work.

What does the court practice say?

At first glance, the provisions of the Civil Code of Ukraine seem logical and simple: if the contractor understands that the client's actions jeopardize the quality of the work or the ability to use the work result, the contractor is obliged to notify the client in a timely manner, and if the client has not corrected the factors that jeopardize the quality or ability to use the work result, the contractor has the right (and in some cases is obliged) to withdraw from the contract and claim damages. If the employer materially violates the contractor's rights, the contractor has the right to apply to the court for termination of the contract and recovery of damages.

However, as is customary in national law enforcement practice, any wave of "obviousness" and "clarity" of a provision is crushed by the rock of case law and judicial interpretation of law. Both Art. 651 and Art. 847 and 848 of the Civil Code of Ukraine contain evaluative concepts that may be perceived and interpreted differently by different parties to the contract and the court. Such concepts include, in particular, "materiality of the breach", "timeliness of the notice", "threat", "quality of the work results", "suitability of the work results" - all these concepts do not have an unambiguous legal definition, and therefore may be interpreted by both the parties to the contract and the court on the basis of their own internal convictions.

Due to the factor of different understanding and assessment of the circumstances of each individual dispute by different parties and the court and, as a result, the impossibility of forming a certain law enforcement practice in this category of cases, we recommend that, if possible, all parties should define in detail the procedure for unilateral withdrawal from the contract at the stage of concluding the contract.

At the same time, when determining the strategy of behavior when protecting the contractor's rights at the stage of contract performance, we recommend paying attention to the Resolution of the Commercial Court of Cassation dated June 18, 2024 in case No. 910/97/22.

The said Resolution has several consistent positions of the Supreme Court regarding the assessment of good faith and contradictory behavior of the parties to the contract during its implementation. In particular, the Supreme Court in this Resolution established that the actions of the plaintiff as the contractor were in good faith, and the actions of the defendant as the customer showed signs of contradictory behavior, which, in turn, affects the correct resolution of the dispute on the merits.

However, it is important to note that the Supreme Court's practice in assessing the good faith of the parties cannot be universal, as each case is unique in its nature and consequences, and therefore, it may not always be appropriate to translate the Supreme Court's practice to the behavior of the parties in another dispute.

Thus, the good faith of the parties to the contract and their behavior during the performance of the contract are essential for the resolution of the dispute in court. However, it should be emphasized that in each case the standards of good faith and contradictory behavior may have different manifestations and not always the behavior that a party considers good faith will be recognized as good faith in court.

In order to ensure a proper evidence base of the contractor's good faith, the contractor should pay attention to active official correspondence with the customer and formalize (document) the process of performing the work as much as possible. Neglect by the contractor to warn the employer in advance of obstacles in the performance of work, neglect of official correspondence (when oral agreements prevail in communication) may later play a cruel joke on the contractor, since the latter must prove its good faith in the performance of work.

In other words, half of the success in protecting the contractor's rights and interests from the actions of an unscrupulous employer depends on the contractor's behavior, its reaction to the employer's obstruction of the contractor's full and timely performance of its obligations under the contract, which may affect the quality of the construction project.

The contractor's behavior is like first aid to a victim - the speed of response to the client's unfair actions significantly affects further developments. Therefore, we urge contractors not to wait for the dispute to develop, but to respond immediately to any manifestation of the customer's bad faith. Wasting paper on official correspondence during the performance of the contract will save you paper for litigation in the future.