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Damages arising from construction projects and the possibilities for contractors to reduce the damages claimed by the contracting authorities

Sofia Cozac
Sofia Cozac

Construction projects are constantly expanding in Romania, both residential as well as road and railway projects.  In the course of such projects, contractors are often faced with the contracting authority’s refusal to pay for the works, or with other types of default, which ultimately lead to the termination of the contract.

Against this background, it is important to note that when certain construction contracts are terminated, and the beneficiary claims amounts resulting from that termination from the contractor, such damages may be limited by the contractor.

This limitation of damages can be successfully achieved by invoking the legal conditions which the damage must meet by reference to recent judicial practice in this regard.

1. Defining elements of the damage under Romanian law

Damage is primarily a condition of civil contractual liability. At the same time, damages should represent the equivalent of such contractual liability. It is important to emphasise that the debtor shall only be liable for the non-performance (applying the broadest definition of the term) of its contractual obligation, within the limits of the damage caused.

Therefore, proof of the existence and the extent of the damage is an absolute prerequisite, since non-performance of the contractual obligation alone does not always give rise to damages.

As a result, damage can be succinctly defined as the sanction for non-performance of contractual obligations.[1]

In order for the debtor to be liable for any damages, one must prove that all the conditions in relation to the awarding of damages are met as per the general law principles. This burden of proof falls on the creditor of the non-performed, or inadequately performed, obligation.[2]

Doctrine and case law have developed certain essential features of the damage, which the courts apply rigorously, and which is highlighted below.

Often, creditors of unperformed or poorly performed obligations claim global damages from the debtor, which go beyond the debtor’s liability.

Thus, in practice, following the termination of contracts for works, the contractors often receive claims from the beneficiaries concerning damages deriving from the beneficiaries’ financing agreements, or other similar agreements, which have been terminated as a result of the termination of the contract for works.

It is, therefore, important to carefully review the legal limits of the damages, in order to correct possible deviations in respect of damages claimed, such as the granting of certain amounts claimed, which exceed the scope of what is defined as “foreseeable damages”.

Below, we have focused on the three essential conditions of the damage, these being the damage has to be (i) direct (ii) certain and (iii) foreseeable.

2. Direct damage

The damage incurred must be as a direct consequence of the debtor’s non-performance, as is clear from the provisions of Article 1530 NCC[3]

In order for the damage to be direct, it is implied that there must be a causal link between the unlawful act itself and the unjust damage caused as a result of that act. It therefore concerns an objective element, the causal link, and not a subjective one.[4]

A creditor is entitled to claim from the debtor full compensation for the damage which the debtor has caused him as a direct and necessary consequence of the unjustifiable or, as the case may be, culpable non-performance of the obligation. The burden of proving the direct nature of the damage lies with the creditor of the non-performed obligation.

The direct nature of the damage is assessed objectively by identifying the causal link between the unlawful act itself and the unjust damage caused as a result of that act. The scope of direct damage includes both the damage caused by a direct causal link as well as by an indirect causal link, also called the ‘rebound damage’. Indirect causation has nothing in common with indirect damage, which is outside the causal relationship.[5]

The indirect causal link concerns compensation for damage caused to third parties, i.e. the indirect victims of the initial damage caused by the illicit deed to the direct victim. In relation to rebound damage, the High Court of Cassation and Justice, in a preliminary ruling decision, rendered that rebound damage is the damage incurred by a third party, as an indirect victim, caused by the initial damage, caused directly by an illicit deed or other event to the immediate victim.[6]

Rebound damage is also directly reparable damage, in so far as it is established that it is the consequence of the same wrongful act committed against another person. Rebound damage may be monetary if the victim has been deprived of a legitimate right or interest, whether of a pecuniary or non-pecuniary nature, even if the method of reparation is pecuniary.[7]

3. Damage must be certain

With regard to the certainty[8] of the damage, one can speak of a “certain” damage when its existence is definite, unquestionable and its extent may be established in the present.[9]

In the event that the contractor can demonstrate that the loss has not actually been incurred by the beneficiary and that the beneficiary has other available remedies, the beneficiary’s claim will be dismissed. This is due to the fact that obliging the debtor of the unperformed obligation to cover all losses of any kind incurred by the creditor would be an unfair remedy and would go beyond the rationale of contractual liability as an institution.

By way of example, the beneficiary of a contract for works may claim the loss of contractual relations with certain third parties as a result of the termination of the contract for works, which then ultimately leads to monetary damages.

In a recent decision rendered by the Timisoara Court of Appeal by way of a second appeal[10], (Ro. recurs), the beneficiary claimed damages twice the value of the contract for works, arising from the loss of financing resulting from the termination of the contract for works. The Court concluded that the damage was not “direct” since the contractor had not been aware of the financing contracts, which were not part of the tender documentation.[11]

The court also ruled in respect of the direct nature of the damage that:

While in cases where the loss is the immediate and direct consequence of the non-performance of an obligation the evidentiary effort may not be difficult, in cases where the creditor claims recovery of losses arising from other sources than the contract between the parties, the analysis to be carried out by the court is much more difficult.

It is thus for the court to examine:

(i) whether the loss was actually incurred by the creditor: and

(ii) whether the creditor has no other remedy available.

Ordering the debtor of the unperformed obligation to cover all losses of any kind incurred by the creditor is unfair and would go beyond the rationale of contractual liability as an institution. If the creditor invokes the loss of certain revenues deriving from a contract with a third party, the court must make a relevant analysis of other remedies that the creditor would have for maintaining the contracts, the specific possibility of contracting again for such benefits and not suffering that loss. (…) In the case at hand, the contracting authority merely invoked the existence of financing contracts with a third party, which the latter has terminated. The contracting authority did not carry out a further analysis of the market conditions with a view to obtaining further financing, nor did it prove that it was unable to contract new funding to cover the costs of the project.”

Both current and future damage that is certain to occur are considered to be certain damage. Actual damages are those which have been fully incurred up to the date when reparation is sought. Future and certain damage is damage that has not yet occurred but is certain to occur and can be assessed in the present on the basis of sufficient evidence.[12] It follows that the certainty of future damage relates both to its existence and to its extent. If it is certain to occur but its full extent is not known, the court will limit itself to requiring the debtor only to repair the damage assessed with certainty[13]:

“The certainty of the damage may not be established if, once the contract has not been performed, one may terminate such contract and conclude a different contract with the same object with another party, since there is no direct causal link between the alleged damage and the unlawful act.”[14]

In that case, the court analysed the remedies available to the creditor and held, for those reasons, that the damage claimed was not direct and certain.

The Romanian courts are therefore reluctant to award losses arising from legal relationships with third parties by considering the condition of certainty of the loss.

4. Foreseeability of damage

The debtor shall be liable only for damage which was foreseen, or could have been foreseen, at the time the contract was concluded as a result of his failure to perform his obligation.[15]

Foreseeability is therefore assessed according to a subjective criterion, that of the foreseeability of the damage at the time the contract was concluded.

As regards the foreseeability of the damage, the Bucharest Court of Appeal held in one case that the conditions for the defendant’s contractual civil liability were not met regarding the certain and foreseeable nature of the damage where the plaintiff had contracted with a third party for a loan having represented that it would pay it with the sums of money which it would have obtained if the defendant had performed its obligations towards the plaintiff.

“As regards the interest and late-payment penalties which the applicant must pay as a result of the concluded loan agreements the Court notes that those elements of the damage were not foreseeable at the time when the financing contract was concluded. Even taking into account the defendant’s gross negligence, the interest and penalties calculated by Deutche Leasing România IFN SA are not the direct and necessary consequence of the defendant’s late performance of its obligation and represent an obligation undertaken by claimant.”[16]

It has been pointed out that the law aims to limit the damages for which the debtor is liable when the extent of the damages is not foreseeable. It has also been held that the law is required to distinguish between intrinsic damage (circa rem)  i.e. the damage which the creditor could have suffered in respect of not receiving the benefit of the obligation and extrinsic damage (extra rem) i.e. the damage which the creditor seeks in respect of the other assets of his estate, as a consequence of him not receiving the benefit of the obligation under the contract, the debtor being liable only for damages circa rem, since these were foreseeable, and the extra rem damages will not be paid by the good faith debtor, since they were not foreseeable at the time the contract was concluded.

It may therefore be determined that, in the absence of sufficient evidence, the foreseeability of the damage cannot in any event be presumed.

***

All of the above elements, having been considered by the case law, are very useful tools to reduce any potential damage claimed by the beneficiary of a contract for works. All the more so as the amount of indirect or unforeseeable damage may be substantial, sometimes even exceeding the value of the contracts.


[1] The provisions concerning damages are contained in the New Romanian Civil Code (“NCC“) under Articles 1350, 1530 and 1537:  Art. 1350: Contractual liability
(1) Every party must comply with the obligations it has contracted to perform.
(2) When, without reasoning, such duty is not complied with, such party shall be liable for the damage caused to the other party and is obliged to repair this damage, according to the law.
(3) Unless otherwise provided by law, neither party may waive the application of the rules of contractual liability in favour of other rules which are more favourable to him.
[2] Art. 1537: Proof of damage
Proof of non-performance of the obligation does not relieve the creditor of the burden of proving the damage, unless otherwise provided by law or by the agreement of the parties.
[3] Art. 1530 Right to damages
The creditor is entitled to damages as compensation for the loss which the debtor has caused him and which is the direct and necessary consequence of the unjustifiable or culpable non-performance of the obligation.
[4] Liviu Pop, Ionuț- Florin Popa, Stelian Ioan Vidu – Elementary Treaty on Civil Law. Obligations, pp. 418, Universul Juridic Publishing House, 2012.
[5] BELU MAGDO Monna-Lisa, Monetary damage in contract matters and its repair. Law magazine no. 4/2020.
[6] High Court of Cassation and Justice, Civil Decision no. 12/16.05.2016, published in the Official Gazette of Romania, Part I, no. 498 of 4 July 2016.
[7] Such a case is provided by Art. 1391 paragraph 2 C. Civ.
[8] The provisions governing the certainty of the damage under Romanian law are set out in Art. 1532 NCC: Art. 1532: The certainty of the damage
(1) In determining damages, account shall be taken of future loss or damage when it is certain.
(2) Damages represented by the loss of an opportunity or of an advantage may be compensated proportionate to the probability of obtaining the advantage, taking into account the circumstances and the specific situation of the creditor.
(3) Damages which cannot be determined with certainty shall be determined by the court.
[9] Liviu Pop, Ionuț- Florin Popa, Stelian Ioan Vidu – Elementary Treaty on Civil Law. Obligations, pp. 415-416, Universul Juridic Publishing House, 2012.
[10] Available here
[11] The Court ruled that: “The moment when the „direct” nature of the damage is assessed is that of the execution of the Contract, and at that time, the Company was not aware of the obligations deriving from the financing contracts, as they were not part of the award documentation.”
[12] M.N. Costin, C.M. Costin, Civil Law Dictionary A to Z Second Edition , Hamangiu Publishing House, Bucharest, 2007, p. 772.
[13] I. Turcu, L. Pop, Commercial Contracts. Conclusion and performance, vol. II, pp. 469-470, quoted by Terzea Viorel in the New Civil Code amended with doctrine and case law of 6 January 2017, Universul Juridic Publishing House.
[14] Bucharest Tribunal, VI-th commercial pannel, dec. no. 36/2010, in C.G. Bădoiu, C. Cucu, Commercial law dictionary, p. 107 quoted by Terzea Viorel in the New Civil Code amended with doctrine and case law of 6 January 2017, Universul Juridic Publishing House.
[15] Art. 1533: Foreseeability of damage: The debtor is liable only for damage which he foresaw or could have foreseen as a result of non-performance at the time of conclusion of the contract, unless the non-performance is intentional or due to his gross negligence. Even in the latter case, damages cover only what is the direct and necessary consequence of the non-performance of the obligation.
[16] See Decision no. 5117/2018 of 6 December 2018, Bucharest Court of Appeal.


Sofia Cozac, Counsel STRATULAT ALBULESCU ATTORNEYS AT LAW
President – Curtea de Arbitraj Dolj

 

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