New practice in disputes related to contractor agreements - The High Commercial Court of Ukraine

Contractor agreement is the most popular way in Ukraine to set out rights and responsibilities for parties when one of them performs works ordered by another. Wide application of contractor agreements unavoidably results in a significant number of disputes related to their fulfillment. The most important results (even though still unambiguous) of such disputes settlement by courts has been generalized by the High Commercial Court of Ukraine in its letter number 01-06/374/2013 dated 18.02.2013.

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Simplified procedure of entry into contractor agreement

Thus, the letter included reference to the resolution number 21/5005/14068/2011 of the High Commercial Court of Ukraine dated 11.05.2012 in which it reached the conclusion that a contractor agreement can be entered into under simplified procedure by means of signing of work completion certificates. A contract that was entered into in such way serves as a ground for creation of commercial responsibilities between its parties. Such conclusion was based on provisions of Section 1 of Article 181 of the Commercial Code of Ukraine according to which an agreement can be entered into not only in the form of a single document that is sealed  and signed by its parties, but also through simplified procedure which in particular includes confirmation of beginning of order execution.

However, in our opinion it is not quite appropriate to compare signing of work completion certificate with entry into contractor agreement. Article 837 of the Civil Code of Ukraine provides that under a contractor agreement a contractor takes an obligation to perform certain work on customer’s request and at his own risk while the latter has an obligation to accept and pay for completed work. Work completion certificate does not mean contractor obligation to complete a certain order at his risk. On the contrary it means that the contractor has fulfilled obligation and the customer accepts the completion. Such certificate may not include all the material terms of contractor agreement, in particular cost of completed works and therefore is impossible to be considered a regular agreement.

Other documents that were exchanged by the parties prior to the moment of works completion and which include all the material terms of contractor agreement (subject, cost, term) can serve as a proof of entry into contractor agreement under simplified procedure. A case that was heard by the High Commercial Court of Ukraine was based on a situation in which parties signed not only work completion certificate but also local estimates related to its completion (as shown by the decision of a court of first instance). In our opinion, the latter played the role of contractor agreement that was entered into under the simplified procedure that is fully in compliance with Article 844 of the Commercial Code of Ukraine. And the fact that courts considered work completion certificates to play the role of contractor agreement instead of estimates is, in our opinion, a mistake which didn’t affect the outcome of the case but could be of great significance when the letter of the high Commercial Court of Ukraine is interpreted in practice. 

Work completion certificate is not an agreement, is it?

The letter of the high Commercial Court of Ukraine included another disputable decision - the resolution number 14/5025/192/11 dated 17.08.2011. The court reached a conclusion that work completion certificate cannot be an agreement based on definition provided by Section 2 of Article 202 of the Civil Code of Ukraine. And therefore the High Commercial Court of Ukraine expressed an opinion that such method of protection of a violated right as recognition of work completion certificate void is improper.

As stated above work completion certificate confirms fulfillment of obligations to a customer by a contractor. Thus, actions related to its drafting and signing are considered as ones that are aimed at termination of contractor obligations to the customer. Section 1 of Article 201 of the Commercial Code of Ukraine provides that actions of a person aimed in particular at termination of rights and obligations are considered to be legal actions. And therefore work completion certificate is also a bargain.

This is also supported by the previously mentioned resolution of the High Commercial Court of Ukraine in which it recognized work completion certificate as an agreement and therefore as a bilateral bargain (agreement is a bilateral bargain under Section 4 of Article 202 of the Civil Code of Ukraine which defines it as coordinated actions of two parties). Incorrectness of the resolution number 14/5025/192/11 dated 17.08.2011 is also proven by Section 4 of Article 882 of the Civil Code of Ukraine which directly provides the possibility of recognition of work completion certificate as void.

Based on this it is not surprising that less than a month later after the letter was introduced the High Commercial Court of Ukraine excluded Subsection 2 which contained a reference to the resolution number 14/5025/192/11 dated 17.08.2011. However parties of that case didn’t feel any relief: the mentioned resolution is not yet cancelled and can cause trouble for other customers who will try obtain a decision about recognition of work completion certificates as void.

Nuances of contractor agreement termination on customer’s request

Another interesting aspect is a conclusion of the High Commercial Court of Ukraine about absence of grounds for termination of agreement in case of customer’s repudiation of the agreement. Such conclusion was reflected in the resolution number 5010/1495/2011-18/65 dated 23.05.2012 based on Article 849 of the Civil Code of Ukraine which provides that the customer can repudiate the contractor agreement at any moment prior to completion of work. Since the mentioned case involved a situation in which the customer repudiated agreement by sending a letter with a demand to terminate it to his contractor and based on Article 849 of the Civil Code of Ukraine according to which such unilateral repudiation does not require contractors consent, the High Commercial Court of Ukraine reached the conclusion that the agreement is terminated and its subject is absent.

We do not deny a possibility of unilateral repudiation of contractor agreement by customer but we would like to express our doubt regarding necessity to recognize any demand of a customer related to termination of agreement as such. The thing is that an agreement can be terminated not only based on unilateral repudiation but also based on mutual agreement of parties or court decision and outcomes of these means of termination of agreement are different. Article 849 of the Civil Code of Ukraine provides that in case of unilateral repudiation of contractor agreement a customer is obligated to pay contractor for the completed part of work and reimburse damages that are caused by such repudiation. At the same time Section 3 of Article 652 of the Civil Code of Ukraine provides that in case of agreement’s termination that is based on significant change of circumstances the court sets consequences of its termination based on necessity of fair division of expenses between parties.

Moreover, the Resolution of the High Commercial Code of Ukraine number 21/045-12 dated 05.09.2012, which was mentioned before, provides that a demand which includes a request to consider it and terminate an agreement can be recognized as an offer to terminate the agreement under procedure provided by Article 188 of the Commercial Code of Ukraine rather than repudiation of such in accordance with regulations provided by Article 849 of the Civil Code of Ukraine. This ground served for the court to deny satisfaction of customer’s claims about recovery or prepayment which was based on such demand about repudiation of contractor agreement.

Thus, the High Commercial Court of Ukraine provided two different opinions regarding two similar cases in which contractor agreements were terminated on demand: in the first case it was interpreted as unilateral repudiation of contract while in the second case it was presented as an offer to terminate a contract. This shows not only the fact that the outcome of such cases is unpredictable but also that when sending demands to contractor about termination of agreement the customer should state his demands clearly.

Payment under contractor agreement

Another two decisions of the High Commercial Court of Ukraine that were mentioned in the letter are not subject to doubt about their correctness. In its resolution number 15/5027/715/2011 dated 23.08.2012 the High Commercial Court of Ukraine reached the conclusion that absence of budget money cannot serve as a ground for impunity for non-fulfillment of contractual obligation. And resolution number 21/5005/14068/2011 dated 11.05.2012 states that refusal of the customer to sign work completion certificate under contractor agreement which is unsupported by timely provided complaints regarding completed work cannot exempt the customer from obligation to pay for it.

The first of the mentioned decisions is in compliance with the judicial practice formed by the Supreme Court of Ukraine (the Resolution number 3-28gs12 dated 15.05.2012) and the European Court of Human Rights (exemplified by cases: “Terem ltd”, “Chechotkin and Olius versus Ukraine”). Besides, as explained by the High Commercial Court of Ukraine, if a customer does not have money to pay he can pause fulfillment of terms of agreement since the moment when he finds out about absence of money that are required for payment. By accepting the result of work he takes an obligation to pay his contractor no matter what.

The second decision was based on provisions of Section 1 of Article 853 and Section 4 of Article 882 of the Commercial Code of Ukraine. According to the first regulation the customer is obligated to accept the work that was completed by a contractor in conformity with contractor agreement, examine it and in case of detection of any drawbacks or inconsistencies with the agreement immediately inform the contractor about them. If the customer provides no such information then he will be unable to provide arguments based on these drawbacks and inconsistencies. And according to Section 4 of Article 882 of the Commercial Code of Ukraine completion of work is formalized by an act which is to be signed by both parties. If one party refuses to sign the act it has to be stated in the act which is then signed by the other party. Since the courts established the fact that the customer unfoundedly refused to accept completed work and didn’t inform about any drawbacks timely the High Commercial Court of Ukraine reached the conclusion that the court of first instance satisfied claim of the contractor about recovery of debt that arose from contractor agreement absolutely lawfully.

Expressing opinion about the letter of the High Commercial Court of Ukraine number 01-06/374/2013 dated 18.02.2013 one can say that despite the fact that majority of its decisions are disputable it may be of some use. In any case by means of the letter both customers and contractors can understand which categories of disputes can be interpreted unambiguously at the level of the High Commercial Court of Ukraine and which most likely not.

This comment was prepared by legal experts of Litigation practice of law firm “Pravova Dopomoga”.