According to Siret one of the most common legal remedy used in the construction contracts is the customer’s refusal to pay the fee when the contractor has breached the contract. In her blog posting Siret explains in what type of situations to use it and how to justifiably do it.

According to Section 111(1) of the Law of Obligations Act a party to the contract may withhold performance until the other party has performed, offered to perform, secured or confirmed the performance. In the last instance it is not sufficient to provide unsubstantiated confirmations, but Section 98(3) of the Law of Obligations Act prescribes that the contractor shall provide written evidence about his ability to fulfil the obligations.

The main obligation of the customer is to pay the contractual fee for the works. If the work is not conforming, then the customer has the right to refuse the payment on the previously referred basis. It shall be borne in mind that refusal to pay the fee is only temporary legal remedy, which can be used until the contractor has improved the work or the customer loses its right to request the improving of the work.

The customer cannot request to improve of the work if he has not submitted this claim within a reasonable time. Thus, the delay in the request to improve the work may lead to the situation where the customer may not be justified to refuse the payment.

In the recent decision of No 3-2-1-18-16 the Supreme Court held that the customer loses his right to refuse the payment also then when he does not inform the contractor within a reasonable time after finding out about the lack of conformity or when he should have found out. In that case the customer can only reduce the price or demand compensation of damages – the customer can set off his claims against the contractor. However the right to withhold the performance due has been lost.

With regard to refusal to pay it shall be born in mind that the use of legal remedy shall not be disproportional.  It would be contrary to the principle of good faith to withhold payment in full when the works only have minor or insignificant defects. In the Supreme Court practise it has been emphasised as well that it is contrary to the principle of good faith where the customer refuses to accept the works in full, while the works are separable to parts and the acceptance of work that does not have any deficiencies would not harm the rights of the customer.

Thus, if the customer wishes to refuse payment, the following shall be noted:

–          The deficiencies should be notified to the contractor within a reasonable time;

–          The demand to improve the works shall be submitted within reasonable time to the contractor;

–          Withholding shall not be disproportional;

–          Contractor has not yet performed his obligation, offered performance, provided guarantee nor confirmed performance.

You may read the post in Estonian at:

For all questions relating to the blog entry, please turn to Sire either via e-mail or phone 680 6850.