Newsletter
THREE NOTEWORTHY SUPREME COURT JUDGMENTS
In many contracts for construction or engineer-ing works, the project owner and the contractor on financial penalties for breaches of contract. While such works are in progress, they may cause damage to neighboring residences. Also, if there are major defects in the work carried out by the contractor, and the owner receives no satisfactory remedy for such defects, the owner may wish to terminate the contract. In three re-cent judgments, the Supreme Court delivered noteworthy interpretations regarding the issues of contractual penalties, damage to neighboring properties, and contract rescission due to defec-tive work.
Article 252 of the Civil Code provides that if a contractual penalty is excessively high, the court may reduce it to an appropriate amount. The Supreme Court addressed this issue in a 2003 civil judgment.
In the case before the Court, a landowner and a construction company entered into a joint construction contract, in which the parties agreed that the landowner should pass the land in question into the management of the con-struction company by a certain date, and that failure to do so would give rise to a penalty. Subsequently, because the landowner failed to transfer the land to the construction company on time, the construction company terminated the contract and sought compensation in-cluding payment of the agreed penalty. However, the landowner asserted that the penalty was too high, and asked the court to reduce it under Article 252 of the Civil Code.
In its judgment, the Court stated that the bur-den of proof in showing that a contractual penalty is too high, a fact that would be to the obligee's advantage, lies with the obligee. The courts should address this issue only if it was raised by one of the parties, and should make a determination based on the evidence presented by both sides, taking into consideration so-cioeconomic conditions and the balance of the two sides' interests. Furthermore, the level of contractual penalties was a matter to be freely determined by and between the parties. If the parties had agreed on such penalties, based on the doctrine of freedom of contract, in princi-ple the courts should respect the will of the parties as expressed in the contract.
In practice, obligees often assert that a con-tractually agreed penalty is too high, and peti-tion the court to reduce it; and courts often do indeed deliver judgments reducing contractual penalties. However, the Supreme Court makes it clear that in principle the courts should respect the level of penalties contracted by the parties, and should only consider whether a reduction is appropriate if the obli-gee presents evidence that a contractually agreed penalty is excessive.
In a 2003 judgment, the Supreme Court ruled on a case in which a residential property had been damaged by construction work on neighboring land, resulting in cracking, ac-cumulation of water, leaning, and subsidence. The owner of the residential property brought an action for damages against the owner of the construction work and the contractor, to compensate his losses in the form of repair costs, loss of economic value, and degradation of external appearance.
In its judgment, the Court stated that the pur-pose of an award of damages is to restore the victim to the condition prior to the damage. The changed situation after the event causing the loss should also be taken into considera-tion. Accordingly, when property has been damaged, the victim may not only claim the cost of repairs, but also compensation for any residual loss in value of the property due to the damage suffered, beyond the cost of repairs. Thus, if the victim can show that he has suf-fered an additional loss of value, including loss of economic value and degradation of external appearance, he may also claim dam-ages jointly and severally from the owner of the work and from the contractor. In other words, the judgment affirmed the right of a victim to claim damages a loss in the form of a reduction in a building's market value due to the damage.
In past court practice, the provisions of Arti-cles 493 to 495 of the Civil Code, regarding a contractor's responsibility to make good de-fects in work, have been held to apply only after the work concerned is completed. However, in a 2003 judgment, the Court stated that if the work is a building or another work on land, and the owner discovers that a part of the work already completed by the contractor is defective to such an extent as to affect the structure or safety of the building or work, then even if the work is not yet complete, the owner may enforce his rights under the above provisions, including demanding connections or rescinding the contract in order to prevent a greater defect or greater damage arising when the work is fully completed.