Have you rescinded an agreement due to untimely payment of remuneration? You will not calculate liquidated damages on such account

In accordance with the resolution adopted by the seven-judge panel of the Supreme Court dated 20 November 2019, case file no. III CZP 3/19, it is not admissible to stipulate liquidated damages in the case of rescinding an agreement due to the failure to perform an obligation of a pecuniary nature.

In connection with the situation caused by the COVID-19 outbreak, the economic situation of a significant number of business entities may deteriorate, while the limited inflow of revenue, as well as the incurred costs, may cause payment backlogs. In turn, a default in obtaining remuneration may constitute an effective ground for a party to rescind the agreement. An exception to the above is Article 15r section 5 of the “Anti-crisis Act”1, under which COVID-19-related circumstances may not constitute the sole ground for exercising the contractual right to rescind an agreement (concerning a public procurement contract).

Whereas there is established case law enabling the calculation of liquidated damages in connection with a rescission, the issue of the possibility for the rescinding party to calculate liquidated damages if the rescission resulted from e.g. default in the payment of the remuneration to the contractor for the performed works was controversial in the case law.

Liquidated damages for rescinding due to non-performance or improper performance of an obligation

Under Polish law it is permissible to stipulate liquidated damages in the case of non-performance or improper performance of a non-pecuniary obligation. Even though the provision clearly stipulates a non-pecuniary obligation, the case law adopted a two-fold approach to the possibility for the parties to stipulate liquidated damages in the case of rescinding an agreement due to the non-performance of a pecuniary obligation.

A part of the case law combined the effectiveness of liquidated damages stipulated in such way with the type of performance which, when not carried out or carried out improperly, was the cause of the rescission. Thus, contractual clauses obliging a debtor to pay liquidated damages were considered ineffective if a pecuniary obligation was the reason for the rescission. In turn, some state courts adjudicated that the stipulation of liquidated damages in the case of rescinding an agreement is permissible, irrespective of the pecuniary or non-pecuniary nature of the parties’ obligations.

Resolution of the Supreme Court dated 20 November 2019, case file no. III CZP 3/19

The above issue was dealt with by the Supreme Court in the discussed resolution. The parties to the dispute were bound by an agreement for the performance of construction and assembly works, which authorised the contractor to rescind the agreement should the contracting authority be late with the payment of the invoice by at least 14 days and fail to pay despite being summoned to do so. In addition, the agreement stipulated liquidated damages of 10% of the value of the given scope of the agreement charged to the contracting authority should the contractor rescind the agreement due to reasons attributable to the contracting authority. Due to the default in the payment of the remuneration, the contractor rescinded the agreement upon a prior request for payment delivered to the contracting authority. In addition, the contractor charged the contracting authority with liquidated damages on account of the rescission.

Can liquidated damages be stipulated for rescinding an agreement?

In its case law the Supreme Court on numerous occasions ascertained the effectiveness of liquidated damages stipulated in the case the agreement is rescinded by the other party.

In the discussed resolution the Supreme Court stated however that the assessment of the effective stipulation of liquidated damages in the case of rescinding an agreement may not be detached from assessing what the non-performance or improper performance of the agreement consisted in.

The resolution introduces a certain type of novum in the form of examining the nature of the reason for the rescission. If the reason for the rescission is the non-performance of an obligation of a pecuniary nature, the calculation of liquidated damages for the rescission will be ineffective. At the same time the Supreme Court adjudicated that it is possible to calculate such liquidated damages if a party rescinded due to the other party’s failure to perform a non-pecuniary obligation.

[1] Act dated 2 March 2020 on special solutions related to the prevention, counteraction and combating of COVID-19, other infectious diseases and crisis situations caused by them (Journal of Laws Dz.U. of 2020, item 568, as amended).