In its decision of 24 November 2021 in case 2-18-13432, the Supreme Court examined the validity of withdrawal from a contract for defective construction work.
The contractor agreed to build a log house manufactured in a factory and assembled on the customer's land. After completion, the customer refused acceptance because an inspection revealed significant defects. Further defects emerged six months later and were not remedied. The customer sued for damages and repayment of the price with late-payment interest.
Grounds and requirements for withdrawal
In the absence of special provisions, withdrawal from a contract for work is governed by the general Law of Obligations Act rules, with the special provisions of section 647. The work must fail to conform to the contract and the contractor must be responsible. A timely withdrawal declaration must be communicated to the other party and justified, particularly by a fundamental breach.
When is a breach fundamental?
A breach is fundamental if it substantially defeats the contract's purpose, which is largely unachieved and unlikely to be achieved, and the resulting loss of the other party's interest was objectively foreseeable to the party in breach. Where work is non-conforming, an additional period for performance must generally be given. Withdrawal without such a period for remediable defects is exceptional.
Is there a deadline for the declaration?
The law does not set a general fixed deadline. The reasonable time for withdrawal is generally shorter than the limitation period for a performance claim. By analogy, circumstances suspending limitation may be considered, including time reasonably spent on negotiations and identifying the breach.
Restoring what the parties received
On withdrawal, each party initially has both a right and an obligation to return what it received from the other. A claimant relying on a fundamental breach may seek repayment under section 189(1) of the Law of Obligations Act; such a claim is not inherently unjustified.
Damages as an alternative
Even if defective work does not justify withdrawal, the customer may claim damages under section 115(1). Compatible contractual and statutory remedies may be used separately or together. Using another remedy does not generally remove the right to damages.
Different requirements for withdrawal and damages
The requirements differ. A damages claim requires non-conforming work for which the contractor is responsible. The court must also assess whether the claimant suffered loss, whether it falls within the protective purpose of the breached obligation and whether the breach caused it.
Reasonable pre-trial legal costs caused by the breach may be direct financial loss. They must be necessary and reasonable in amount. Costs related to withdrawal may be unnecessary if the court finds that withdrawal was invalid.
Read the decision: 2-18-13432.
