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Your contractual partner is insolvent. Can you stop supplying goods or services?

Your contractual partner is insolvent. Can you stop supplying goods or services?

13.6.2012 13:38
Autor: Petr Hrnčíř, KSB

Here is one view on the matter.

When businesses enter into a contract to supply goods or services standard rights and obligations arise, including, on the one hand, in relation to the delivery of goods or the provision of services, as well as liability for defects, and, on the other, payment of the purchase price. Complications could therefore arise if insolvency proceedings were started against a contractual partner in the period between the conclusion of the contract and the time of its performance.

The law states that if, after concluding a contract, it is apparent that the other party cannot fulfil its obligations due to its incapacity or its conduct in preparing to fulfil its obligations, performance may be refused until that party performs (including by paying the purchase price) or until its performance is newly secured. Here two fundamental legal principles clash: 1) pacta sunt servanda, or “agreements must be kept”, and 2) a company’s management must act with the due care of a prudent business person.

The commencement of insolvency proceedings need not always be a serious problem, however. Insolvency proceedings themselves cannot constitute grounds for refusing supplies to another party – we should bear the “pacta sunt servanda” principle in mind. On the other hand, the above-mentioned rule that “a company’s management must act with the due care of a prudent business person” also applies. Under this principle, it is always necessary to ascertain the details of the case in question – who filed the application to start insolvency proceedings, why did they do so, and what is the opinion of the representative of the company against which the insolvency proceedings were commenced?

If, after assessing such points, it is likely that the party facing insolvency proceedings will fail to fulfil its obligations arising out of a specific contract, it is possible to refuse performance, i.e. to refuse to supply the contracted goods and services to such party. At the same time, the first party must inform the second party in advance that it is prepared to supply the goods or services, provided the second party pays for them at least upon delivery (unless this has already been contractually agreed) or, as the case may be, if the second party newly secures its performance, for example, by granting a pledge or similar security.

In my opinion, this conduct is contemplated by the law, since it provides protection against the given risks and, at the same time, is fair. What kind of a business would supply goods for which it will clearly never get paid, because of the bankruptcy of its contractual partner? In bankruptcies, creditors usually receive a minimum of the bankruptcy assets and, moreover, after the bankruptcy is declared they cannot request performance already rendered to be returned. The procedure I describe above applies similarly for those who conclude a contract not pursuant to the Commercial Code (such as businesses) but pursuant to the Civil Code.

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