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Rescission, liquidated damages, faulty documentation, settlements and counterclaims – arrogance is not a good advisor!

Is it worth defying the giant when the giant is the author of the contract and dictates the contractual terms?

The issue of the contractual relationship between a giant and a small specialist often arouses emotions. This is also the case here, where a dispute arose between a large chemical company and a small but highly specialised contractor for a complete VOC waste gas treatment system.

The subject of the litigation was whether there had been an effective rescission of the contract by the ordering party (the chemical concern) and whether the contractor (the small specialist) was liable to pay the high liquidated damages demanded by the ordering party and whether the manner of performance and cessation of the contract affected the parties’ settlement?

In other words, does David stand a chance in a clash with Goliath?

1. What did the court find?
The District Court („Sąd Okręgowy”) found, and the Court of Appeal („Sąd Apelacyjny”) positively reviewed, that the immediate cause of the ordering party’s rescission of the contract was the contractor’s failure to meet the deadline for the delivery of complete technical documentation for all industries and the piecemeal delivery of the documentation, in a manner inconsistent with the contract.

However, according to the opinion of the expert witness, the documentation submitted by the sued contractor was sufficient to realise the investment!

The defects in the documentation referred to by the concern – the ordering party – were insignificant and did not prevent the completion of the subject of the agreement, and in view of the obligatory contractor’s project supervision, they could certainly have been eliminated during the realisation of the investment! Therefore, the contracting authority’s position, in which it called on the contractor to have the documentation completed, does not prove that the documentation was incomplete and not in accordance with the contract, but at most that the documentation had defects. The defects could have been remedied in the course of the installation under the author’s supervision. Calls for their removal on pain of
rescission of the contract had no basis.

Consequently, in the opinion of the Courts, it is impossible to conclude, as alleged by the ordering party, that the documentation received from the contractor was piecemeal and made it impossible to realise the subject of the agreement.

The ordering party’s actions focused not on the performance of the contract, but on highlighting the deficiencies of the documentation. Therefore, there were no grounds for rescinding the contract due to the contractor’s fault and, consequently, there were no grounds for imposing a contractual penalty on the contractor.

2. What next?
Meanwhile, the effect of the corporation’s insistent demands for the contractor to provide ‘complete’ documentation was that the parties’ interaction in the performance of the contract/agreement ceased. The courts noted that while there were no grounds for the claimant – the ordering party – to rescind the contract due to the contractor’s fault, it was undoubtedly the case that such a rescission actually occurred as a result of both parties ceasing to perform the contract, which was not disputed by them (Article 60 of the Civil Code).

The courts emphasised that, in such a situation, there was a termination of the contract between the ordering party and the contractor, but not by consensual agreement, but as a result of the actual cessation of contract performance by both parties.

Such termination of the contract had an ex nunc (future) effect and not an ex tunc (retroactive) effect, which means that the legal consequences of the contractual provisions were not nullified in this way (so the justification of the Supreme Court’s judgment of 18 October 2017, II CSK 237/17).

3. It is time to settle accounts with Goliath!
In such a situation, the contract still provides a contractual basis for settlement between the parties, based on an assessment of the conduct of each party to the contract during its performance.

Therefore, the small contractor represented by us can count on a settlement of its expenditures and losses incurred during the performance of the contract, while the contracting giant has lost the right to claim liquidated damages and the possibility to ‘terminate’ the performance of the contract ‘under the existing conditions’. The small contractor was brave – it had a weapon it used and filed a counterclaim to guarantee itself a settlement!

It is not enough to be the author of a contract that ‘imposes’ exorbitant requirements.

A deluded sense of power and stubbornness devoid of reflection even of a giant leads to losses.

The biblical King David already knew this.