How can the supplier achieve the release of the retention?

In work contracts there is often a clause for so-called retentions. The purchaser uses these retentions mainly to ensure that the contractor performs the work properly. In practice, however, it may happen that the purchaser makes it impossible for the supplier to comply with the conditions for releasing the retentions. In this article, we outline how to proceed in one such specific case.

Clarification of terms

Conditions are an integral part of more complex legal agreements to which the creation, modification or termination of rights or obligations may be linked. A condition may be linked to various events or facts, it may be objective events, facts dependent on the will of third parties or even the will of the person performing the contract. It is necessary for the condition to be uncertain, which means that it is not known whether it will actually occur. Otherwise, it would be a determination of time.

Simply put, retention is a part of the price under the work contract that is paid under a special regime only when the condition to which it is linked is met. Retentions are widely used in the construction industry, where they are often a condition for the handover and acceptance of the work without defects and deficiencies. As such, the retention is not anchored in any legal regulation and depends only on the contractual agreement of the parties.

It is also common for the parties to agree to divide the retention into two parts, the first to be paid on handover without defects and the second after the expiry of the warranty period. The purchaser is thus assured that the supplier will perform without defects, which may be obvious at handover but may also appear subsequently within the warranty period.

Practical example

The purchaser and the supplier entered into a contract for work in which they agreed on the progressive partial fulfilment of the obligation (so-called "in sections"), and also agreed on a 5% retainer, which was bound to the condition of handing over and accepting the entire work without defects and imperfections and the possible elimination of defects and imperfections within the warranty period. The total value of the contract was CZK 1,000,000 and it was to be performed in five parts, each time after the completion of a certain section - sections A, B, C, D, E (i.e. CZK 200,000 for each section).

The total price of the retention was therefore CZK 50,000, for each partial section then CZK 10,000, the retention was to be fulfilled half after the handover of the work without defects and deficiencies and the other half after any removal of defects and deficiencies within the warranty period.

The supplier was allowed to complete the first three sections - A, B, C, for which he was paid a total of CZK 570,000. However, the purchaser decided not to allow the supplier to complete the remaining two sections - D, E and to have these sections completed by another supplier. The supplier was therefore faced with the situation that it could no longer fulfil the condition of handing over the entire work without defects and deficiencies (as the remaining sections had already been completed by another supplier), as a result of which the CZK 30,000.00 retention was not paid to the supplier.

In this respect, the law provides protection to the party to whose disadvantage the other party (in our case the purchaser who had a third party complete the remaining part of the work) has thwarted the condition. This issue is regulated by Act No. 89/2012 Coll., the Civil Code ("the CC"), specifically in our case the provisions of Section 549(2), which states that “If a party benefiting from non-fulfilment of a condition deliberately frustrates the fulfilment of the condition without being authorised to do so, the condition is considered to have been fulfilled”. 

The statutory text implies 4 elements of impermissible influence of a condition, namely: impermissibility, intentionality, illegitimacy and benefit. It is important to pay attention especially to the last three elements. (BERAN, Vladimír. Section 549 [Unauthorised fulfilment or thwarting of a condition] In: PETROV, Jan, VÝTISK, Michal, BERAN, Vladimír et al. Civil Code. 2nd edition (2nd update). Prague: C. H. Beck, 2023, marg. No. 4.)

Intentionality means that the person acted with intent to thwart the condition, the consequence must occur, a mere effort to bring about the consequence is not sufficient.

Illegitimacy, on the other hand, defines whether the person was not authorized to do so, i.e., there must be a wrongful act, which need not only arise from a legal provision, but may also be a breach of a contractual obligation.

And lastly, a benefit can be defined as any advantage gained as a result of thwarting a condition. The benefit has to be considered in the overall context of the thwarted condition, so that if the wrongdoer has made the act disadvantageous to him as well, but "more disadvantageous" to the other party, there will still be a benefit.

Therefore, if the supplier is unable to fulfil the condition - handover without defects and deficiencies - for the release of 5 % (CZK 30,000) of the retention price of the work, due to the purchaser as an unauthorised person thwarting the fulfilment of this condition to the benefit of such purchaser, a legal fiction arises that the condition is deemed to have been fulfilled. As a result of the fulfilment of this legal fiction, the supplier shall be entitled to claim a release of 5% of the price of the completed parts of the work.

Conclusion

Conditions and retentions in works contracts are key elements that serve primarily to protect the rights of the purchaser. However, we have illustrated through an example situation how a supplier can defend itself in a situation where the conditions for the release of a retention are deliberately thwarted by the purchaser and how it can therefore obtain the release of the retention.

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Responsible Attorney: JUDr. Lukáš Dořičák, LL.M., MBA, Matěj Menšík contributed to this article.