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Position of the Supreme Court on the consequences of cooperation without contract

12/ 11/ 2018
  Vorobtsova Julia. Senior Legal Advisor, Accountor Ukraine As a general rule, business relationships require entering into written contracts. However, despite this legal requirement, many companies neglect contract work, and this oversight often gives rise to unnecessary money and time outlays both for conducting business and resolving disputes. The issue of contract conclusion was in 2018 repeatedly considered by the Supreme Court which ended up formulating its position on how contract conclusion rules should be interpreted. Ruling on Case No. 338/180/17 dated June 05, 2018 is a clear example of the latest position held by the Supreme Court on this matter. According to this case, a company contacted an individual entrepreneur with a proposal for entering into a contract under which the individual entrepreneur would have manufactured from its own material wooden posts and timbers for further construction. The individual entrepreneur signed copies of the contract between the parties and repeatedly sent it for signature to the company. But the contract ended up not being signed by both parties. The company transferred some of the funds to the account of the individual entrepreneur who started performing the required work immediately after such transfer. The company then proceeded to send a letter to the individual entrepreneur requiring that the funds be returned as transferred erroneously. The individual entrepreneur declined to return the funds voluntarily so the company filed a court action for recovery of transferred funds as well as payment of a penalty of 3% per annum and inflation losses. The courts of all instances ruled in favor of the individual entrepreneur and for recovery from the company of the amounts unpaid for the work performed by the individual entrepreneur and for supplied construction materials. Such ruling is based on Article 642 of the Civil Code of Ukraine which provides that if someone who has received an offer to conclude a contract performs an action (ships goods, provides services, performs work, pays required cash amount, etc.) within the term for offer response, such action is deemed acceptance of the proposal unless otherwise specified in the proposal for contract or otherwise provided by law. Given that the parties had agreed upon a list and cost of works and given the performance of some of the agreed conditions by the company (transfer of some funds) and by the individual entrepreneur (manufacture and delivery of wooden posts and timbers), the Supreme Court agreed with the conclusions of the courts of previous instances and upheld that the parties had entered into a contract. The Supreme Court concluded that contracts cannot be deemed unconcluded after their full or partial performance by the parties. So, on the one hand, contracts must be made in writing, but the law also regulates situations where contracts are not, for some reason, signed and provides for different consequences in each specific case depending on the circumstances. The above example illustrates the importance of regulating relationships between parties in writing. Clear regulation of cooperation conditions, deadlines, acceptance of results, payments, contract termination, refunds, etc. allows avoiding unnecessary money and time outlays for dispute resolution in court where final outcome is uncertain. To minimize risks, we recommend paying close attention to contract work when doing business, in particular: Agreeing upon all essential terms and other cooperation conditions during negotiations and including them in the contract; Concluding contracts in compliance with the requirements for form of contract; Obtaining a second counterpart signed by the party as well as other documents related to contract conclusion and performance before proceeding with the performance of contractual obligations; Properly recording and storing contracts and related documents. To provide recommendations on contract work, it is necessary to consider each specific case individually taking into account the particularities of each individual case. Our specialists have extensive experience in contract work and would be pleased to assist and advise on contract drafting. They would also be pleased to assist with the resolution of existing disputes as well as advise on contract work organization as a whole. Please feel free to contact us if you have any questions.

Vorobtsova Julia

Senior Legal Advisor, Accountor Ukraine

As a general rule, business relationships require entering into written contracts. However, despite this legal requirement, many companies neglect contract work, and this oversight often gives rise to unnecessary money and time outlays both for conducting business and resolving disputes.

The issue of contract conclusion was in 2018 repeatedly considered by the Supreme Court which ended up formulating its position on how contract conclusion rules should be interpreted.

Ruling on Case No. 338/180/17 dated June 05, 2018 is a clear example of the latest position held by the Supreme Court on this matter. According to this case, a company contacted an individual entrepreneur with a proposal for entering into a contract under which the individual entrepreneur would have manufactured from its own material wooden posts and timbers for further construction. The individual entrepreneur signed copies of the contract between the parties and repeatedly sent it for signature to the company. But the contract ended up not being signed by both parties. The company transferred some of the funds to the account of the individual entrepreneur who started performing the required work immediately after such transfer. The company then proceeded to send a letter to the individual entrepreneur requiring that the funds be returned as transferred erroneously. The individual entrepreneur declined to return the funds voluntarily so the company filed a court action for recovery of transferred funds as well as payment of a penalty of 3% per annum and inflation losses.

The courts of all instances ruled in favor of the individual entrepreneur and for recovery from the company of the amounts unpaid for the work performed by the individual entrepreneur and for supplied construction materials. Such ruling is based on Article 642 of the Civil Code of Ukraine which provides that if someone who has received an offer to conclude a contract performs an action (ships goods, provides services, performs work, pays required cash amount, etc.) within the term for offer response, such action is deemed acceptance of the proposal unless otherwise specified in the proposal for contract or otherwise provided by law.

Given that the parties had agreed upon a list and cost of works and given the performance of some of the agreed conditions by the company (transfer of some funds) and by the individual entrepreneur (manufacture and delivery of wooden posts and timbers), the Supreme Court agreed with the conclusions of the courts of previous instances and upheld that the parties had entered into a contract. The Supreme Court concluded that contracts cannot be deemed unconcluded after their full or partial performance by the parties.

So, on the one hand, contracts must be made in writing, but the law also regulates situations where contracts are not, for some reason, signed and provides for different consequences in each specific case depending on the circumstances.

The above example illustrates the importance of regulating relationships between parties in writing. Clear regulation of cooperation conditions, deadlines, acceptance of results, payments, contract termination, refunds, etc. allows avoiding unnecessary money and time outlays for dispute resolution in court where final outcome is uncertain.

To minimize risks, we recommend paying close attention to contract work when doing business, in particular:

  • Agreeing upon all essential terms and other cooperation conditions during negotiations and including them in the contract;
  • Concluding contracts in compliance with the requirements for form of contract;
  • Obtaining a second counterpart signed by the party as well as other documents related to contract conclusion and performance before proceeding with the performance of contractual obligations;
  • Properly recording and storing contracts and related documents.

To provide recommendations on contract work, it is necessary to consider each specific case individually taking into account the particularities of each individual case. Our specialists have extensive experience in contract work and would be pleased to assist and advise on contract drafting. They would also be pleased to assist with the resolution of existing disputes as well as advise on contract work organization as a whole. Please feel free to contact us if you have any questions.

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