Freedom of Contract and the Effects of Withdrawal from a Construction Contract

In construction contracts, the parties often decide to include a provision stating that a declaration of withdrawal from the contract will have effect only for the future (ex nunc). This solution is primarily intended to simplify settlements between the parties in the event of premature termination of cooperation and arises from practical doubts as to whether withdrawal from a construction contract takes effect only for the future or also retroactively (ex tunc).

In practice, doubts may arise in relation to two issues:

• firstly, whether the stipulation of an ex nunc effect applies to statutory or only contractual grounds for withdrawal;
• secondly, what happens if one of the parties decides to submit a declaration of withdrawal with retroactive effect (ex tunc) contrary to the contract.

The parties to a contract have a certain freedom in shaping the legal effects of their actions on the basis of the freedom of contract resulting from Article 353¹ of the Civil Code. Thanks to this, they may regulate the rules under which each of them will have a “contractual” right to withdraw from the contract (Article 395 of the Civil Code), including by agreeing that withdrawal will have effect only for the future. Article 395 § 2, first sentence of the Civil Code provides that, upon exercise of the right of withdrawal, the contract is deemed not to have been concluded, which might suggest that withdrawal can only have retroactive effect. However, the “absolute” nature of this provision lies in something quite different – where the parties have not otherwise regulated the effects of withdrawal, it is assumed that withdrawal has an ex tunc effect.

What is particularly important is that Article 395 of the Civil Code does not make the possibility of defining an ex nunc effect dependent on the nature of the contract, and in particular on whether the parties’ performances are divisible or indivisible. In the case of a construction contract, this is significant because, in the event of a dispute, the court, when assessing whether the withdrawal was made under a contractual provision, will not have to consider the doctrinally disputed nature of the performance but will immediately proceed to assess whether the conditions for making such a declaration were met.

The direct legal basis for withdrawal may also be statutory provisions of a dispositive nature. This group includes, among others, Articles 635 and 636 of the Civil Code, which may be entirely excluded by the parties; the conditions for their application may be modified, and finally, the parties may stipulate that a declaration of withdrawal made on their basis will have effect for the future.

In fact, doubts as to the admissibility and scope of modification of statutory grounds for withdrawal from a construction contract may arise only in respect of provisions that are ius cogens. For example, Article 491 of the Civil Code raises several issues, the resolution of which is by no means obvious. Firstly, the question arises as to how far the mandatory nature of this provision extends. In this case, logic suggests that the legislature primarily prohibited contractual exclusion of Article 491 of the Civil Code and also does not allow the extension or limitation of the catalogue of situations in which it will apply. Article 491 of the Civil Code does not use as direct a statement as Article 395 § 2 of the Civil Code concerning the effect of withdrawal. If it contained a stipulation that, in the event of withdrawal, the contract is deemed not to have been concluded, the mandatory nature of the provision would also extend to determining the effects of withdrawal. Only such wording of Article 491 §§ 1 and 2 of the Civil Code would mean that the parties, applying this provision, could withdraw from the contract only with retroactive (ex tunc) effect. In interpreting this provision, its placement in the title relating to all types of mutual contracts is also significant. Its application should therefore enable withdrawal with either ex nunc effect (in simplified terms – in the case of contracts for divisible performance) or ex tunc effect (in the case of contracts for indivisible performance).

Another issue is whether the nature of the performance arising from a construction contract allows withdrawal with ex nunc effect at all. This issue largely comes down to determining whether the contractor’s performance is divisible or indivisible, assuming that taking effect for the future is possible only in the former case

The issue of divisibility of performance is governed by Article 379 § 2 of the Civil Code, which provides that performance is divisible if it can be rendered in parts without material change to the subject or value. In the case of construction contracts, such a provision does not dispel doubts as to the nature of the contractor’s performance, as evidenced by the mutually exclusive content of Supreme Court judgments from the last two or three decades.

The lack of agreement in this respect arises from the specific nature of the contract itself, which often escapes the attempts of lawyers who insist on fitting construction contracts into the narrow framework of a contract for specific work. Meanwhile, the determination of whether the contractor’s performance is indivisible or divisible should take into account that sometimes the subject of the contract will be the construction of a garden shed, in another case a dual carriageway section of an expressway, and in yet another, four independent residential buildings.

Since the subject matter of a construction contract is so broad and may differ not only in the scale of the project but also in the possibility of using one part without completing another, adopting an a priori assumption that the contractor’s performance is always indivisible seems at least irrational.

Of course, there are arguments supporting the theory that the performance under a construction contract is indivisible. One such argument is the wording of Article 654 of the Civil Code, which refers to the possibility of partial acceptance of works by the investor. It seems that the legislature deliberately used the expression that the investor does not “accept” but merely “takes over” the works performed. In this way, it clearly distinguished between the effect associated with partial delivery of the works (the investor may at most take them over) and the final acceptance (the investor may accept them and subsequently use them).

Contrary to appearances, the divisible nature of the contractor’s performance is also not determined by the fact that they may receive payments during contract performance before the entire object is completed. The adoption of such a solution was necessary primarily from the point of view of economic practice rather than to preserve the principles of civil law, such as equivalence of performances. It is difficult to imagine a general contractor undertaking a multi-year contract while financing the works for several years without generating any revenue.

Having regard to these considerations, the question arises whether the parties to a construction contract can in any way secure the effectiveness of their right to withdraw with ex nunc effect if the declaration is made under Article 491 of the Civil Code.

Referring to the case law of both the Supreme Court and common courts, it should be assumed that the parties should, in fact, arbitrarily treat the contractor’s performance as divisible – for example, by setting successive stages of work to specific dates. Such a division of individual project phases will also be helpful in interpreting to what extent the partially performed obligation has value for the investor. Courts have repeatedly pointed out that “whether the parties’ performances are divisible depends primarily on their will, expressed in the contract and interpreted in accordance with the directives contained in Article 65 § 2 of the Civil Code” (e.g. judgment of the Court of Appeal in Warsaw of 8 November 2018, VII AGa 1073/18).

Moreover, adopting such an assumption is necessary from a practical standpoint. It may happen that a party submits an effective declaration of withdrawal based on two legal grounds: contractual and statutory. A declaration cannot, however, produce effects in two mutually exclusive ways.

In this context, the question arises as to how to assess a situation where – despite a contractual stipulation that withdrawal produces effect only for the future – one of the parties submits a declaration of withdrawal with ex tunc effect.

Having regard to the principles of interpretation of declarations of intent, one should lean towards the view that such a declaration will be effective but with ex nunc effect. If a party expressed the will to definitively terminate cooperation, it cannot be stated, contrary to its intention, that no withdrawal occurred at all merely because the effect was incorrectly (or contrary to the contract) specified in its content. On the other hand, the interpretation of such withdrawal should not lead to granting the party rights directly contrary to the content of the contract.

Therefore, investors and contractors should not avoid provisions regulating the effects of withdrawal from the contract. The risks associated with introducing such clauses can be minimized through appropriate interpretation of the submitted declaration of withdrawal.