Compensation for delay due to contractor’ fault?

In view of the unification of jurisprudence in the presence of conflicting court decisions on the issue, the President of the Supreme Bar Council of Bulgaria Ralitza Negencova sends a statement on the matter with a request to be given an interpretative decision on the matter by the Supreme Court by interpretative case № 7/30 09. 2013.

 Members of the Supreme Bar Council

Members of the Supreme Bar Council

Does it owe a penalty for delay under Article 92, paragraph 1 of Obligations and Contracts Act, when the contract is terminated due to contractor’ fault?

The question referred was opened due to following controversial cases:

1. First solution was given by Decision 206 of 05.05.20010 on by Commercial case 18/2009 of the SCC, in which is assumed that when the parties have agreed default of late performance of the debtor’s obligation, then the contract is terminated by the complete failure, the debtor is liable to pay the agreed penalty by the claim on the ground art. 92 of the Obligations and Contract Act.

Considerations set out in the reasoning of the decision are that even on the basis of Article 88, paragraph 1, of the OCA sentence 1 termination of the contract leads to cancellation of obligations taken by the parties does not mean that the creditor is deprived of the right to claim compensation for non performance or damages by argument of art. 88, para 1, sentence 2 of the OCA.

2. Second solution was given by Decision №17 on 19.03.2010 by Commercial case 414/2009 of Supreme Court of Causation. This decision accepts that responsibility for damages caused by the cancellation of a contract in the form of penalty determined at the conclusion of the contract may be claimed only if such a default has been agreed to compensate the negative interest violations for the upstanding party, as such a possibility of compensation generally permitted in Article 88, paragraph 1, of the OCA sentence 2According to the court, in case of termination of the contract cannot enforcement being sought, nor have nonperformance and therefore if default has been agreed for the poor (slow) performance, it will not be due.

Тhe President of the Supreme Bar Council considered second solution for the proper one, explicitly making it clear that the issue in the two cited above hypothesis decision is not the case of termination of the contract with the continuous or periodic performance where the termination is effective only in the future, according to the provision of Article 88, paragraph 1, of the OCA sentence 2.

The arguments for this conclusion are as follows:

1. Breach of a contractual obligation exists in any case where the debtor does not perform exactly as agreed, i.e. both full default as well as accomplishing inaccurate, as the case may be inaccurate failure could be both quantitative and qualitative, and also in respect of time - the case of Article 79, paragraph 1 of OCA.

2. Breaching of contract is giving rise to the liability of the debtor, which correspond to certain rights of creditor. Thus, under Article 79, paragraph 1 and paragraph 2 of the Obligations and Contracts Act in case of default, the creditor is entitled to claim from the debtor (1) or performance with compensation for the delay or (2) compensation instead of performance, but in this second hypothesis, the debtor can offer initially due along with compensation for the delay if the contractor still has an interest in the implementation.

3. The forfeit is a clause into a contract that is associated with possible failure to meet obligations and compensation for damages of non-compliance. In this sense, the forfeit is secondary in nature, it is always associated with another primary obligation under the contract. According to the legal definition of forfeit in Article 92 of the Obligations and Contracts Act this contract term goals, on the one hand, to ensure the proper performance of the obligation and, on the other hand, serve as compensation for the damages of a possible default without the need such a damage to be proved either as type or size.

4. If based on nonperformance the creditor is suffering greater damage, he may claim compensation for the excess over the agreed default - Article 92, paragraph 1, of the OCA sentence 2. But if a forfeit is excessive compared to the actual damage or if the obligation is fulfilled partly or incorrect, the debtor may apply to the court with a request to reduce its size - Article 92, paragraph 2 of the OCA.

5. When the contract is bilateral and is canceled due to the fault of the debtor (Article 87 of OCA) according to Article 88, paragraph 1 of the OCA termination is retroactive, i.e. retroactively  drop out parties’ commitments and mutually they owe returning of given by the contract (Article 55, Paragraph 1, Proposal. 3 of OCA). Once the commitments are dropped and not performance is owed, it should logically nonperformance and dropout obligation to not constitute grounds for liability of the debtor. But the law takes account of the fact that it is the debtor’s wrongful conduct led to termination of the contract, thus expressly provides that in the case of termination, the creditor is entitled to compensation for damages from the breach of contract.

6. In view of the above, in bilateral agreements, various events of default are possible depending on the nature of the obligations and also depending on the different situations of failure - inadequate performance or complete nonperformance. Accordingly, of any such cases of default, defaulting party would be responsible for damage caused by the breach, the parties may agree in advance what compensation would be due as agreed on a case for default - for a delay penalty and the penalty for complete nonperformanceAnd if the law expressly provides for the right to compensation for damage caused by failure in termination of the contract, the parties could therefore still at the conclusion of the contract to understand the compensation of such damages as agreed penalty for failure, leading to termination of the contract.  This way for the correct party there will no be need to prove damage suffered by the termination of the contract and receive the agreed compensation.

7. In conclusion, applying the principle of contractual freedom (Article 9 OCA) parties to a bilateral contract may agree both as compensation for inaccurate (delayed) performance and default for failure, leading to termination of the contract. Accordingly, in an action for the award of default, the court in interpreting the contract and seeking the actual will of the parties (article. 20th OCA) should primarily clarify whether the alleged penalty was agreed for the case of poor performance or in the event of default giving rise to the termination of the contract. In the latter case, a penalty clause will be implemented despite the abolition of the contract retroactively, because the possibility of damages by such breach is expressly provided by law.  

Comments are closed.