Breach of contractual obligations by legal entities: violations and consequences in Civil Law

Agreements stand as a fundamental and widespread legal transaction globally, entailing the initiation, cessation, or alteration of rights and duties. They are integral to various dealings, from acquiring real estate or vehicles to selling goods, participating in conferences, and managing transport or flights.

For most private legal relationships, agreements serve as a key and accessible method to document such relationships. Yet, agreement violations are not uncommon. This raises questions for clients about what exactly constitutes a breach of agreement. Where is the line drawn between a failure to fulfill contractual obligations and inadequate execution of a duty? And importantly, what are the consequences of violating agreement terms, and what methods exist to ensure the fulfillment of contractual obligations?

To demystify the intricacies of contract law, our experts offer their assistance. Our lawyers possess expertise in resolving conflicts effectively and drafting agreements while considering all potential risks for clients and safeguarding against losses. Our range of services encompasses agreement drafting, counterparty negotiations, and, when needed, support in pre-litigation dispute resolution.

This material specifically addresses instances of contract non-compliance. We will examine typical scenarios and possible solutions to prepare you for action when encountering such problems in contracts and agreements.

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Breach of Contractual Obligations: Understanding Violations and Consequences in Civil Law

Non-performance of contractual obligations, as defined in the Civil Code, refers to either the failure to fulfill an obligation or the improper fulfillment of contractual conditions. For instance, if a supply agreement is made and the supplier fails to deliver goods, it is a case of non-performance. If the delivery is delayed, it constitutes improper performance.

In both scenarios, whether it’s non-performance or improper performance of obligations, there are definite legal repercussions for the parties involved. These consequences can include:

  • The imposition of penalties or fines;
  • Compensation for damages and moral harm;
  • Alteration of the obligation or even cancellation of the obligations;
  • Termination of the agreement.

For example, consider a contract where our client was obliged to pay for goods after their delivery. However, when the goods were not delivered, the client rightfully refused to fulfill the payment obligation. In this scenario, we prepared the necessary communication to the counterparty to address the issue.

To avoid penalties and liabilities arising from non-performance or improper performance of contract terms, it is advisable to precisely outline the terms of the contract. Incorporating convenient mechanisms and clauses in the contract that allow effective operation and response to various situations is also crucial. Moreover, seeking legal counsel can be invaluable in navigating these complexities.

Methods to Secure Contractual Obligations

To guarantee fulfillment of the agreement, we have long employed various methods that act as preventive measures and motivate parties to adhere to their commitments. These methods include:

1. Penalty: A straightforward method of ensuring obligation fulfillment involving fines or penalties for non-performance or delayed performance. Daily examples include penalties for late tax payments or fines for breaching confidentiality agreements.

2. Suretyship: A method where a guarantor either jointly or partially assumes responsibility for the debtor's obligation to the creditor. For instance, in bank loans, if the debtor can't secure the obligation with assets, a guarantor can be involved.

3. Guarantee: Involves a bank or financial institution providing a guarantee for the debtor's obligation fulfillment. Banks typically offer this service for a fee.

4. Pledge: This involves transferring certain assets as collateral to guarantee obligation fulfillment. The most common form is a mortgage (pledge of real property), widely used in real estate and construction. The logic is that, in case of non-fulfillment by the pledger, the pledgee can enforce the pledge. For example, when clients seek to arrange a mortgage for a property, we carefully analyze such agreements as non-fulfillment could lead to the loss of property.

5. Retention: Withholding the transfer of an item to the debtor until they fulfill all obligations. Common in everyday situations, such as withholding a repaired item until the repair costs are paid.

6. Deposit: A common method where a certain amount is given as a deposit or "guarantee" for payment fulfillment. The deposit usually serves as an advance payment for fulfilling obligations. The advantage is that if the debtor fails to fulfill their obligations, the deposit remains with the creditor.

7. Trust Ownership: Transferring property into trust ownership to fulfill the debtor's obligation.

As you can see, the methods for ensuring obligation fulfillment vary and are applied depending on the situation and the nature of the obligations. For instance, a client who wanted to purchase property through periodic installments was advised to consider a mortgage. When facilitating the sale of an apartment, a deposit agreement was made between the seller and the real estate realtor.

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How to "Compel" the Other Party to Fulfill Obligations?

Parties enter into contractual obligations with an understanding of the consequences, including those of non-fulfillment. If one party fails to fulfill its obligations, this non-performance or breach can lead to negative outcomes for that party. To motivate parties to adhere to their obligations, the following measures are commonly used:

  • Contractual Penalties: These include fines and penalties stipulated in the contract for non-performance or improper performance of an obligation. For instance, if an obligation is not fulfilled on time, a penalty for the delay can be enforced.
  • Utilizing Enforcement Mechanisms: For example, enforcing a claim on the subject of a mortgage if the mortgagor fails to pay the agreed amount to the mortgagee, or claiming funds under a deposit if the other party refuses or fails to fulfill an obligation.
  • Sending a Claim with a Demand to Fulfill the Obligation: Claims, as a method of pre-litigation dispute resolution, can often be effective. For example, we successfully obtained compensation for a client for damaged goods through a claim by demonstrating violations, causation, and the damage inflicted on the client. Additionally, we outlined to the counterparty the additional expenses they would incur for legal and expert fees, further incentivizing them to settle the matter.
  • Filing a Lawsuit.

Dispute Resolution Methods

Dispute resolution can broadly be categorized into pre-litigation and litigation methods. Pre-litigation resolution involves the possibility of the parties reaching a mutual agreement and compromise. For example, parties may agree to modify an obligation or the terms of its fulfillment.

In the case of our client, their customer ordered a certain volume of services, divided into multiple phases. However, during one of the service delivery phases, the counterparty underwent structural changes, rendering part of our client's services unnecessary. Instead of pursuing legal action, the parties agreed to modify the scope and stages of service delivery, formalized through an additional agreement to the existing contract.

Mechanisms like offsetting mutual claims, deferral, or debt restructuring can also be used. Generally, if parties are willing to negotiate and resolve disputes out of court, choosing the right tool is crucial but a technical aspect of the process. If the dispute cannot be resolved pre-litigation, the only option left is to file a lawsuit against the counterparty, debtor, creditor, etc.

Our team is always ready to provide high-quality legal support, fostering the development of stable and beneficial business relationships. Our services include:

  • Analyzing contracts and assessing potential risks for your business;
  • Drafting and amending contracts;
  • Preparing appendices, additional agreements, and other related documents;
  • Assisting in contract termination;
  • Writing claims, composing acts, specifications, and more;
  • Resolving disputes, both in and out of court.

Our experts in contract law are ready to provide legal support at any stage, ensuring the effective protection of your interests.

For details about our contractual services, please refer here.

Publication date: 14/11/2023

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