The investor’s lack of cooperation and rescission of a construction contract | In Principle

Cooperation between the parties is essential to implement many contracts. This is particularly so in the case of a construction contract or a contract to produce a specific work, where the purpose of the contract is achieved over the course of a fairly complex process and comprises many elements. The Polish parliament has recognised this strong dependence and has provided a far-reaching solution applicable when the necessary cooperation is lacking. Such a situation may even lead to rescission of the contract.

Statutory provisions

Pursuant to Art. 640 of the Polish Civil Code, if performance of a specific work requires the client’s cooperation and the client does not cooperate, the contractor may set a reasonable period for the client to provide the needed cooperation, and if the deadline is not met the contractor will be entitled to rescind the contract. This provision governing a contract to perform a specific work (umowa o dzieło) also applies as relevant (Civil Code Art. 656 §1) to contracts for construction works. This means that when the investor refuses to cooperate, the contractor may call on the investor to cooperate (setting a reasonable period for this purpose), and if the investor does not comply, the contractor may rescind the contract.

This is a radical solution causing annihilation of the contract and setting aside the need for the parties to perform their obligations under the contract. Therefore, the consequences of not cooperating can be severe. However, the failures on the part of the investor must be commensurate with the severity of the consequences of non-cooperation. These failures should be sufficiently momentous under the legal relationship between the parties to avoid the risks that the rescission will be ineffective. It will be difficult to recognise the effectiveness of rescission in the face of a minor failure on the part of the investor, which did not prevent the contractor from properly performing the contract. Therefore, a contractor who wishes to exercise the right to rescind the contract on this account should be careful in assessing the investor’s compliance with its duty to cooperate during performance of the contract.

The essence of cooperation

Cooperation is necessary not only in accepting performance (e.g. handover of the work), but often arises in the course of contract performance, in particular when the contract is complex and implementation of the contract is carried out in stages. By its very nature, a construction contract cannot be performed without genuine cooperation of the parties. In practice, cooperation usually involves taking factual or legal steps necessary for completion of the contract (e.g. providing plans, designs, documentation, materials or instructions necessary for implementation of the contract, handing over the construction site, providing access to key premises).

Significantly, under the case law of the Supreme Court of Poland, the investor’s lack of cooperation cannot consist in merely delaying payment of the contractor’s fee (judgment of 3 December 2004, case no. IV CK 340/04). Although payment of the contractor’s fee is a key obligation of the investor, failure to make timely payment will not give rise to a right to rescind the contract under Civil Code Art. 640.

Conditions for rescinding contract

Pursuant to Art. 640 of the Civil Code, for rescission of a contract to be effective, three conditions must be met:

1. Lack of necessary cooperation on the part of the investor. The failures must relate to the investor’s obligations necessary for implementation of the contract, connected with the actions on the part of the contractor (e.g. delivery of the construction site or documentation needed for implementation of the contract),
2. Setting a reasonable deadline with the threat of rescission. The deadline must be appropriate to the type of obligation which the investor is evading. The period cannot be too short. It must allow the investor to meet its obligations under the circumstances. Additionally, it should be made clear to the investor that failure to meet the deadline will result in rescission of the contract. The absence of such a warning may render a subsequent rescission of the contract ineffective.
3. Failure to meet the deadline. Rescission will be possible only after the deadline passes and the investor has failed to comply. A separate declaration of rescission is also required for the rescission to be effective—rescission will not automatically occur due to the investor’s failure to meet the deadline set by the contractor.

Effects of rescission—settlements of the parties

In the event of effective rescission of the contract, the investor must pay the contractor’s fee despite non-performance of the work (or failure to complete the work). But the fee is reduced by the amount saved by the contractor as a result of failure to perform or complete the work (Civil Code Art. 639). This will include, for example, unpurchased materials and other costs that the contractor would have incurred if the work had been performed (Supreme Court judgment of 23 June 2004, case no. V CK 587/03).

Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners