12.01.2023 — Excessive Price of Works in Construction Contract May Lead to Contract Invalidity

Lower courts found a contract to be invalid because its price was higher than the market price by multiple times. The Supreme Court agreed. The reasoning is that the construction contract in question was concluded on manifestly and significantly unfavorable conditions for the customer and its conclusion caused substantial detriment to the customer, which the contractor should have known as a professional participant in the construction market.

A recent case dealt with a contract for interior fit-out works. The total price of the works was slightly higher than 4 million rubles. The customer sought to invalidate the contract in a Russian arbitrazh (commercial) court by reference to Article 174(2) of Civil Code of the Russian Federation, which says that a contract concluded to the manifest detriment of a legal entity is invalid. The customer argued that the terms and conditions of the contract were manifestly unfavorable to the customer and caused detriment to the customer as a legal entity.

According to pre-existing case law and the previous guidance of the Supreme Court, a contract concluded on terms that are clearly and substantially unfair to the other party may be invalidated on this ground, particularly where the value of one party’s performance is clearly lower than the value of the other party’s consideration, such as the price. It is not necessary to prove collusion or conspiracy between the representatives of the parties to the contract in such a case.

In the case at hand, the court-appointed expert study revealed that the market value of the works at the time of the conclusion of the contract was about 800 thousand rubles, which is several times lower than the contractually agreed price. For that reason, the courts of three instances decided that the contract was concluded on manifestly and significantly unfavorable terms for the customer. The courts declared the contract null and void and ordered the contractor to repay the difference between the contract price and the market value of the works to the customer.

The Supreme Court refused to grant leave to appeal and reconsider this case in a hearing of its Judicial Panel for Economic Disputes, effectively confirming the conclusions of the lower courts that the construction contract whose price is several times higher than the market value of the works determined by an expert is invalid. In refusing to accept the case for reconsideration, the Supreme Court noted that the contractor as a professional participant in the construction services market knew or should have known that the price was excessive (see Ruling of the Supreme Court of the Russian Federation dated 12 January 2023 No. 310-ЭС22-28130 on case No. А23-3928/2020).