In business practice, it happens that the creditor imposes a contractual penalty multiple times for the same breach. In some cases, it raises concerns that it may be more profitable for the creditor to prolong the state of breach to allow itself to charge a higher contractual penalty. In such cases, the question arises as to whether the creditor can do so and how to defend against the creditor profiting from the debtor’s breaches and contractual penalties being charged.
Duty to cooperate: what is it and who must comply?
A contract is a legal bond between the creditor and the debtor. When thinking about the performance of a contract, usually the focus is on the obligations of the debtor as the party actively performing the contract. However, under a contract, obligations may be imposed on the creditor as well. The duty to cooperate is no exception to this rule – the compliance with the duty to cooperate rests not only with the entity performing a contract (e.g. a contractor performing certain construction works), but also with the creditor (e.g. investor/employer).
Under Article 354 of the Civil Code, the debtor should perform the obligation in accordance with its content, in line with its social and economic purpose and in compliance with the principles of community life and customs (if established). The creditor should cooperate in the performance of the obligation in the same manner.
Accordingly, Article 354 § 2 of the Civil Code provides for a general duty of cooperation by the creditor with the debtor in performing a contractual obligation.
How the creditor cooperates in performing a contract?
The nature and extent of the creditor’s (e.g. investor/employer) duty to cooperate with the debtor in the performance of a contract is broadly discussed in case law and legal academic literature. This discussion comes down to two main viewpoints:
- the creditor’s duty to cooperate is exclusively negative, i.e. it consists in not hindering the debtor in the performance of the contractual obligation, while positive action can be expected from the creditor when it results from the nature of the obligation or the contract1;
- the creditor’s duty to cooperate with the debtor includes the duty to participate actively in the performance of the obligation2.
The view presented in item 2 above, to which the authors of this publication incline, extends the creditor’s duty to cooperate beyond the limits set by a contract. The creditor’s duty to cooperate with the debtor should also be understood as a duty of loyalty towards the counterparty, i.e. to refrain from anything that would be a violation of the principles of honesty and fairness in mutual relationships3.
Should the creditor, as part of the cooperation, immediately inform the debtor that prerequisites for charging a contractual penalty have been met?
It is necessary to first answer the question whether the creditor’s duty to cooperate with the debtor also extends to seeking to minimise the debtor’s obligations under a given contractual relationship. In other words, should the creditor (e.g. investor/employer) – when there are grounds for charging the debtor (e.g. contractor) with contractual penalties – take steps to reduce the potential value of the liability to be paid by the debtor (contractor)? This is important because the prolongation of the period of charging contractual penalties correlates with the duration of the period in which the creditor’s interest is being infringed (e.g. the investor must use a defective facility).
It is commonly known that multi-million contractual penalties are charged for failing to remedy defects within 
the warranty period or for failing to report subcontractors4. Instead of solving the problem (state of breach), public employers seem to prefer to persist in the existing situation and charge contractual penalties for subsequent periods. This may lead to the enrichment of employers with penalties charged to contractors for often minor infringements.
The interpretation of the duties imposed on the creditor under Article 354 § 2 of the Civil Code seems to allow to oblige the harmed creditor to prevent the damage burdening the debtor or to minimise its extent5. If, as a result of the creditor’s breach of its duty to cooperate, the damage incurred by the debtor has increased, and there is a causal link between the creditor’s action and the increase in damage, the harmed creditor should be deemed to have contributed to the occurrence of or increase in the damage6.
This view is confirmed by case law. The Appellate Court in Warsaw held that: „The creditor’s cooperation in these circumstances, pursuant to Article 354 § 2 of the Civil Code, should also consist in promptly notifying the claimant of the identified irregularities. A different issue here is whether it would be economically reasonable for the defendant to provide such information, since charging the contractual penalty generated several times more revenue for the defendant than cooperating in the performance of the contract in accordance with its content and pursuant to Article 354 § 2 of the Civil Code”7.
In addition, the Supreme Court confirmed in one of its judgments that an element of the creditor’s duty to cooperate is preventing damage and mitigating its extent8. This concept is also known to international law – the UN Convention on Contracts for the International Sale of Goods provides for the duty to mitigate the damage suffered, which manifests itself in the duty of the harmed party to take measures „which are reasonable under the circumstances to limit the loss, including loss of profit, caused by the breach of contract”.
The above provides a clear answer to the discussed question – when performing its duty to cooperate in the performance of a contractual obligation, in the event of identifying grounds for charging the contractor with any contractual penalties, the creditor (employer/investor) should charge it immediately after establishing the existence of grounds for doing so. In this way, the debtor – notified immediately of the existence of grounds for a contractual penalty – would be able to immediately remedy the breach and avoid further penalties. It is also part of the cooperation to point out to the other party possible failures, in order to enable it to perform the contract properly, and not just to tacitly cumulate claims.
Is the creditor’s failure to cooperate taken into account in the judicial reduction of contractual penalties?
The issue of the creditor’s failure to cooperate is also considered when a court decides on the potential reduction of the contractual penalty. Courts reason that if a breach had been severe, the creditor would have certainly immediately informed the debtor of the need for improvement. Since this did not happen, the breach was practically negligible for the creditor and the penalty can be drastically reduced.
The Appellate Court in Warsaw, in reducing a penalty by 95%, ruled as follows: „The State Treasury represented by (…) did not indicate that the delay on the part of the defendants required any action on the part of the employer or disorganised its work. On the contrary, according to the principles of logic, if such a situation had occurred, the claimant would certainly have informed the defendants shortly after the expiry of the deadline for the submission of the reports by the defendants that they were not fulfilling this contractual obligation. However, the claimant was inactive and tolerated the lack of reports for several months. The defendants timely performed their obligation after the claimant’s first notification in this respect.” (Judgment of the Appellate Court in Warsaw of 19.04.2018, case No. I ACa 70/17).
Is there a chance to defend the debtor against the creditor’s cumulated claims of which the creditor did not inform the debtor?
The principles of loyalty and honesty, as well as the obligation to minimise the extent of the debtor’s obligation to pay a contractual penalty, as discussed above, lead to the conclusion that the creditor is not entitled to cumulate claims against the debtor and assert them several years later, e.g. after completion of the contract or withdrawal from it. This argument gives the debtor a chance to defend itself against such a claim – both at the pre-litigation stage and at the stage of judicial reduction of the contractual penalty.
If your company has been defending against a contractual penalty charged several times for the same breach or is already involved in a court dispute regarding such claim, our experts will be glad to discuss with you possible solutions. The JDP Litigation Team have extensive experience in handling this type of proceedings.
Kontakt:
Wojciech Bazan – attorney-at-law | Partner, Litigation and Arbitration Team, Infrastructure Team
Justyna Solarska – attorney-at-law | Senior Associate, Litigation and Arbitration Team, Infrastructure Team
1 E.g. Judgement of the Supreme Court of 24.04.2013, case No. IV CSK 621/12 and judgement of the Supreme Court of 25.02.2015, case No. IV CSK 297/14, Legalis.
2 E.g. M. Safjan, in: Pietrzykowski, Kodeks cywilny. Komentarz, 2020, v. I, art. 354, item 15.
3 M. Safjan, in: Pietrzykowski, Kodeks cywilny. Komentarz, 2020, t. I, art. 354, item 15, F. Błahuta, in: Kodeks cywilny: komentarz, 1972, v. II, p. 849; cf. judgement of the Supreme Court of 27.03.2013, case No. V CSK 112/12, Legalis, and judgement of the Supreme Court of 18.04.2013, case No. III CSK 243/12, Legalis.
4 E.g. https://www.mostostal.waw.pl/relacje-inwestorskie/raporty/biezace/raport-nr-70_informacja-w-sprawie-pozwu-o-zaplate-
5 E.g. A. Sowa, Zachowanie poszkodowanego a wysokość odszkodowania w systemie odpowiedzialności kontraktowej, Państwo i Społeczeństwo, 2015 (XV) No. 1, p. 64.
6 M. Kaliński, Szkoda na mieniu i jej naprawienie, Warsaw 2011, p. 541.
7 Judgement of the Appellate Court in Warsaw, case No. VII AGa 419/19, Legalis.
8 Judgement of the Supreme Court of 18.04.2013, case No. III CSK 243/12, Legalis.