16 February 2016 Vitaliya Skalatskaya

Inadmissibility of dual liability.

Our Managing Partner Denis Gudkov and a senior lawyer Vitaliya Akimova protected a client from the recovery of 25 million default charge for violation of the work performance timeline.

In 2013 a client of the Gudkov, Korelskiy, Smolyarzh law firm, a construction company well-known in the region, entered into several contracts for the construction of diamond field facilities, having strategic significance for the country.

Under one of them the contractor had to build a shift camp for the customer's workers at the field. After completion of a considerable part of work, the customer agreed on more favourable terms with the company client's subcontractor and repudiated the contract with the prime contractor.

For a minor violation of the work performance timeline the contractor, by the award of the Commercial Court of the Arkhangelsk Region, was charged a contractual penalty of approximately 2 million rubles. However, the customer, who after one year and a half came to think that its rights had been violated, went to court with another claim for the recovery of a default charge of 5% of the contract value (which was around 500 million and the default charge, respectively, 25 million) for the customer's unilateral repudiation of the contract.
Indeed, one of the contract clauses provided for default charge if the customer repudiates the contract in case of the violation of the work performance timeline by the contractor.  That is, in spite of the different wording, a fixed-sum default charge was set for the delay of the work, the same as the penalty.

In circumstances where the contractor had incurred liability in the form of a penalty, recovery of a default charge for the same violation constitutes dual liability, which is unacceptable from the perspective of the general principles of law, civil legislation and judicial practice. Attachment of dual liability is contrary to the principles of Russian civil law, stipulating that only one punishment may be imposed for one offense.

The same follows from the explanations provided in paragraph 6 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 13 and the Supreme Commercial Court of the Russian Federation No. 14 dated 08.10.1998 "On the practical application of the provisions of the Civil Code of the Russian Federation regarding the interest for the use of borrowed money." This approach is supported by recent legal precedents.

All arguments of the Gudkov, Korelskiy, Smolyarzh law firm were found valid and the court dismissed the customer's claim stating that: Since the inadmissibility of dual liability for the same offence constitutes a general principal of law, including civil law, combined with the discretionary nature of the regulation of civil law relations relations, the court believes that in the current situation the customer could choose one form of the contractor's liability for improper performance of its obligations, out of those provided in the contract.

The claimant has exercised such right, having recovered, in a judicial procedure, the penalty. The defendant did not commit any additional acts that could have made it liable to pay the default charge as well." It is worthy of note also that the contract, which draft had been offered by the customer, did not contain any "mirror" provisions concerning the customer's liability in case of its wrongful acts, that is, the balance between the interests of the parties was seriously upset.

In the terms of the Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation No. 16 "On freedom of contract" dated 14.03.2014, such contract provision represents an unfair contract term and, by request of the weak party to the contract (which is the contractor in the owner-contractor relations) shall not be enforceable.