A contract must be performed in respect of the right person, at the right time, in the right place and in the correct manner. As a rule, these circumstances are based on the contract itself but in the absence of a more precise agreement, it is possible to rely on the provisions of the Law of Obligations Act. For example, according to the Law of Obligations Act, where the quality of the performance of a contractual obligation cannot be determined from the contract or from the law, the party must perform the obligation to a standard no less than average in the circumstances. In addition, if the time for the performance of an obligation is not set and cannot be determined from the nature of the obligation, the obligor must perform the obligation within a reasonable period of time after the contract is entered into, in particular taking into account the place, manner and nature of the performance of the obligation.
Breach of contract
A breach of contract means the non-performance or unsatisfactory performance, including delayed performance, of the obligations. The contracting parties can specify what is meant by a breach of contract and the consequences thereof in the contract. In the absence of such agreements, the applicable consequences are provided for by the Law of Obligations Act.
For certain types of contracts, the use of legal remedies against the weaker party to the contract has been regulated in more detail in the Law of Obligations Act. For example, a lease contract and a consumer credit contract regulate how many payments can be missed by the tenant or the consumer before the other party to the contract has the right to cancel the contract. It is not possible to derogate from the provisions of the law to the detriment of the tenant or the consumer.
The obligee cannot rely on failure to fulfil the obligation by the obligor if he himself caused such failure.
As a rule, the obligor is not responsible for a breach of contract if the breach was due to force majeure (if it occurred due to circumstances beyond the obligor’s control and if that party could not be expected to have taken these circumstances into account when the contract was entered into, or to have avoided or overcome such circumstances or their consequences, e.g. a natural disaster). Despite the responsibility of the obligor, the obligee may take certain legal remedies against the obligor, such as withdrawing from or cancelling the contract or reducing the price.
In the cases provided for by law or in the contract, a person is liable for non-performance only if the person is culpable of the non-performance. The types of culpability are carelessness, gross negligence and intent. In the law, such liability standard is foreseen, for example, in a contract for the provision of healthcare services. Generally, the lack of force majeure is the basis for liability in contract law.
Legal remedies for failure to fulfil obligations
Legal remedies for failure to fulfil an obligation are as follows:
- When submitting a claim to performance, the obligee demands performance of obligations (e.g. payment of money, performance of a job, transfer of the purchased items) from the obligor. Payment of money can always be claimed. The performance of a non-monetary obligation cannot be claimed if the performance is impossible or unreasonably costly or burdensome for the obligor, the obligee can reasonably achieve the result pursued in another manner or if the performance of the obligation consists of providing a service of a personal nature. A claim to performance also covers claims to improve or replace or otherwise compensate defective performance as far as it can be reasonably expected from the obligor.
- Withholding performance of an obligation. If the contracting parties have mutual obligations arising from a contract, a contracting party may withhold performance until the other party has performed, offered to perform, secured or confirmed the performance.
- A reduced price can be applied by the obligee if they have accepted an unsatisfactory performance. This is based on the difference in value between satisfactory and unsatisfactory performance. The price will be reduced upon submission of an application to the other contracting party. If the person has already paid an amount in excess of the reduced price, the refund of the amount paid in excess can be demanded in the event of a price reduction.
- A penalty for late payment is a legal remedy in the event of delayed performance of a monetary obligation. The obligee may charge the obligor a penalty for late payment from the time the monetary obligation became due until performance of the contract was resumed. If the rate of the penalty for late payment has not been specified in the contract, it is possible to apply the statutory rate, i.e. the interest rate provided for in section 94 of the Law of Obligations Act plus 8% a year.
- Claim for compensation of damage. The purpose of compensation for damage is to place the aggrieved person in a situation as near as possible to that in which the person would have been if the circumstances which are the basis for the compensation obligation had not occurred. To file a claim for compensation of damage, the damage must have arisen from a breach of contract and the obligor must be responsible for the breach. Force majeure excludes the responsibility of the obligor. Material as well as non-material damage will be compensated. Damage will not be compensated for to the extent that prevention of damage was not the purpose of the obligation or provision due to the non-performance of which the compensation obligation arose. A non-conforming party must only compensate for such damage which the party foresaw or should have foreseen as a possible consequence of non-performance at the time of entering into the contract, unless the damage is caused intentionally or due to gross negligence.
- Withdrawal is the legal remedy for termination of the contract. Withdrawal from the contract is possible in the event of a fundamental breach of contract. If the fundamental breach occurred with regard to one part, it is possible to withdraw from that part of the contract only, unless the breach was not fundamental with regard to the contract as a whole. To withdraw from the contract, a declaration of withdrawal must be submitted to the other contracting party. A withdrawal relieves both parties from the performance of their contractual obligations, but does not affect the validity of the rights and obligations created before the withdrawal. In the event of withdrawal from a contract, each party may claim return of whatever was transferred or supplied under the contract and the gains received if the party returns all that was transferred or supplied.
- Cancellation is a legal remedy for terminating long-term contracts in the event of fundamental non-performance or with good reason when changes have occurred in the contractual relationship or in the relationship that served as the basis for the contract. A party can cancel a contract by making a declaration of cancellation to the other party. Cancellation of the contract releases both parties from the performance of their contractual obligations. The rights and obligations arising from the contract before cancellation remain valid. Upon cancellation of a contract, the parties are only required to return that which has been delivered in advance with respect to the time of cancellation of the contract.
An obligee may choose between the legal remedies that they consider practical and expedient. They may also use several legal remedies in combination, unless their joint use is precluded due to their nature, the law or the contract. For example, it is possible to withdraw from the contract, and at the same time demand a penalty payment with regard to a delay in performance of the obligation. On the other hand, it is not possible to demand compensation for damage and reduce the price at the same time.
If you have been late with the performance of an obligation or otherwise behaved inappropriately, it would be a good idea to first contact the other contracting party and try to reach an agreement on the next steps. The other contracting party must be immediately informed about a suspected breach of contract to minimise the damage which may occur and give the contracting party the opportunity to compensate the breach. Any delay in informing the other party may also remove the option of using certain legal remedies later. It is entirely possible that the defaulting party voluntarily compensates the damage caused by the breach or remedies the non-compliance. If the obligor fails to perform the obligations voluntarily, the obligee may take the matter to court.
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