Prepayments under the contract – is it possible to recover through the court?

The concept of prepayment includes all payments that the customer must make under the terms of the agreement up to the moment of delivery of the result of the work to him. But what if prepayments are provided, but the customer does not pay them? Can these prepayments be recovered through the courts? 

Our client approached us with the following questions. After finalizing an agreement with the customer for the execution of several projects valued at hundreds of millions of rubles, our client commenced their implementation. The agreement stipulated that advance payments were required, with the initial advance set at 30 percent of the total project cost, followed by subsequent payments upon completion of the work. 

Time went by, some of the work had already been finished, but no progress had been made. Additionally, there were several ongoing tasks, like laboratory research and drilling wells for sampling, which required substantial investments, which our client had to cover out of their own pocket. 

Despite the agreement stating that these costs would be covered by the prepayments received, in practice, most agreements do not explicitly mention the possibility of recovering prepayments in court, according to Zoya Filozop, partner and head of the intellectual property and TMT practice. 

In such cases, the rule outlined in paragraph 3 of Article 328 of the Civil Code of the Russian Federation applies, which means that the ability to seek legal recourse is greatly restricted if the contractor has not met their responsibilities in a proportional manner as it stated in the agreement. However, there is a possibility of an exception if the agreement specifically allows for the judicial recovery of advance payments. 

If it is not possible to start working without receiving payments in advance, the contractor should halt the work until the payment is made, and inform the customer in writing about this. If, however, the contract includes the legal collection of advance payments, the contractor can not only halt work but also take legal action to collect the money.

When the work continues without interruption and the agreement does not include judicial recovery procedure, the only way to receive payment through the court is if the specified outcome in the contract is achieved. It is also possible to use the legal grounds to modify or terminate the agreement due to a significant violation of the contract by the opposing party.

The end outcome of the project undertaken by the client who reached out to us was the completion of the project documentation, which needed to pass a state examination. Nevertheless, the desired outcome was not attained, and the project documentation did not successfully pass the state examination. The approval of this examination is contingent not only on the efforts made by our client, but also on the submission of documents regarding the intended funding from the Customer. 

Therefore, in this situation, the potential for legal recovery was not established, and the majority of the tasks had already been finished, but the desired outcome of the work - the approved design documentation - was not attained.