Debtor not paying under a contract: what to claim and who is liable

You do not have to terminate the contract to claim the debt, interest or contractual penalties. While the contract is in force, you can demand performance and, at the same time, penalties for late performance. Termination is a separate choice. It suits you when you no longer expect the other side to perform and you want back what you have already paid. If there are several debtors, the general rule is that each is liable only for their own share. You can claim the whole debt from any one of them where liability is joint and several under the law or the contract, or where the subject of the obligation is indivisible. Where the obligation relates to the provision of services, joint and several liability is presumed. The best place to start is a written demand with a clear deadline.

Do you need to terminate the contract before going to court?

No. Article 6.213(1) of the Civil Code of the Republic of Lithuania (CK) says that if a party fails to perform a monetary obligation, the other party has the right to demand performance in kind. Put simply, you can demand payment of the debt, and the contract stays in force.

Liability for the breach arises without termination too. A person who has failed to perform a contractual obligation must compensate the other party’s losses and pay contractual penalties (Article 6.256(2) CK).

A common question is whether you can demand both performance and penalties. Article 6.258(2) CK answers it: the creditor cannot demand penalties and actual performance together, except where the debtor has missed the deadline for performance. An agreement providing otherwise is invalid. So for late performance you can claim both the debt and the default interest (contractual late-payment penalty) set in the contract.

If you terminate the contract later, you do not lose your money claims. Termination does not remove the right to claim damages and contractual penalties (Article 6.221(2) CK).

In our practice, what the law allows and what is worth doing are not always the same. For example, a contractor has not finished the works, the deadline passed long ago, and emails go unanswered. The customer asks whether they can first sue only for the contractual sanctions for delay. They can. But one dispute is then split into several cases, and the main question – the works, or the money already paid – stays unresolved. In such a case we usually suggest terminating the contract first and then claiming all amounts in one case.

When to terminate the contract, and how

You can terminate unilaterally, without going to court, where the other party’s breach is fundamental (Article 6.217(1) CK). Article 6.217(2) CK lists what is taken into account. For example, whether you are substantially deprived of what you expected under the contract, and whether the breach gives you grounds not to expect performance in the future.

Where a deadline has been missed, the rule is simpler. The injured party may terminate the contract if the other party does not perform within an additional period set for it (Article 6.217(3) CK). The steps are:

1. You set, in writing, a reasonable additional period for performance and notify the other party of it (Article 6.209(1) CK). In the same notice you may state that the contract will be terminated unilaterally if the other party does not perform within that additional period (Article 6.209(3) CK). This option does not apply where the unperformed obligation is a minor part of the defaulting party’s contractual obligations (Article 6.209(4) CK). While the additional period runs, you may suspend your own performance and claim damages, but you cannot use other remedies, unless the other party tells you it will not perform (Article 6.209(2) CK). The Code does not say expressly whether such a warning replaces the advance notice under Article 6.218(1) CK. In our view, the safest course is to do both: set the additional period and, once it has passed, give notice of termination as in step 2.
2. If the contract is not performed within that period, you give notice of termination. It must be given in advance within the period set in the contract or, if the contract sets none, thirty days in advance (Article 6.218(1) CK). Check the contract first – it often has its own termination notice period.

Termination releases both parties from performing the contract (Article 6.221(1) CK). You may then demand the return of everything you transferred to the other party in performing the contract, while returning at the same time what you received from them (Article 6.222(1) CK). This matters where you paid an advance and the works were not done.

We do not repeat the general rules on performing contracts here. They are covered in our article Performance of contracts and the consequences of non-performance (in Lithuanian).

What you can claim

• The debt. This is the main claim under Article 6.213(1) CK.
• Interest. If the contract sets no interest, the law does. How much and from when is explained in Court order in Lithuania: court fee, interest and the bailiff.
• Penalties. Penalties (netesybos) are a sum of money set by law, contract or court that the debtor must pay if an obligation is not performed or is performed improperly (Article 6.71(1) CK). If they are unreasonably high, or part of the obligation has been performed, the court may reduce them, but not below the losses (Article 6.258(3) CK). A shortened limitation period of six months applies to penalties (Article 1.125(5) CK). So do not let them build up for years – claim them in time. More on this: What you need to know about contractual penalties (in Lithuanian).
• Damages. Damages are the money value of harm: loss of or damage to property, expenses incurred and lost income (Article 6.249(1) CK). A business debtor is liable only for losses it foresaw, or could reasonably have foreseen, when the contract was made (Article 6.258(4) CK). They also include reasonable expenses of recovering losses out of court (Article 6.249(4)(3) CK). Remember: when you claim damages, contractual penalties are set off against the damages (Article 6.258(2) CK). You will not recover the same amount twice.

Several debtors: each for their share, or all for the whole debt?

The general rule is that where there are two or more debtors, each must perform the obligation in equal shares. This is a several (pro rata) obligation (dalinė prievolė), and only the law or the parties’ agreement can provide otherwise (Article 6.5 CK).

A joint and several obligation is not presumed. It arises only where the law or the parties’ agreement provides for it, or where the subject of the obligation is indivisible (Article 6.6(1) CK). The law presumes it where the obligation relates to the provision of services, joint activity or compensation for damage caused by several persons (Article 6.6(3) CK).

What joint and several liability means for you as creditor:

• you can demand performance from all or some of the debtors together, or from any one of them separately, and for the whole obligation or part of it (Article 6.6(4) CK);
• if one debtor paid only part, you can claim the rest from any of the others or from all of them together (Article 6.6(5) CK);
• once one debtor fully performs the joint and several obligation, the others are released from performing it to the creditor (Article 6.6(7) CK). You cannot recover the same debt twice.

How the debtors then settle among themselves does not affect you as creditor. The debtor who paid has a right of recourse against the other co-debtors in equal shares, less their own share, unless the law or a contract provides otherwise (Article 6.9(1) CK).

The most common cases where the law itself makes liability joint and several:

• Spouses. For obligations under transactions needed to maintain the family household and to bring up and educate the children, spouses are jointly and severally liable, whatever their property regime. The exception is where what is paid for the transaction is clearly excessive and unreasonable (Article 3.109(2) CK). Nor does joint liability arise where one spouse, without the other’s consent, takes a loan or buys goods on instalments when this is not necessary for the family’s common needs (Article 3.109(3) CK).
• Surety. When the obligation is not performed, the debtor and the surety are liable as joint and several co-debtors, unless the suretyship contract provides otherwise (Article 6.81(1) CK). So when you contract with a new client, you can ask for a suretyship from its manager or shareholder.

The opposite example is co-owners. Each co-owner is liable to third parties under obligations relating to the common property in proportion to their share (Article 4.76 CK). The debt is then divided by shares, and each is liable for their own.

Can several debtors be sued in one claim? Yes, where the claim concerns duties they share under the law, or claims of the same kind based on the same facts and law (Article 43(1)(1) and (2) of the Code of Civil Procedure of the Republic of Lithuania (CPK)). A claimant may join several related claims in one statement of claim (Article 136(1) CPK), but the court has the right to separate them into different cases (Article 136(3) CPK). In our practice, where a debt is divided among several people and each is liable only for their share, we file a separate claim against each.

One more limit. You can claim only from whoever owes under the contract or invoice. Another company that is merely related to your debtor cannot be brought into the case without a separate legal basis. We explain this in the FAQ on our contractual disputes page (in Lithuanian).

Where to start

1. Gather the documents. The contract, invoices, a statement of payments and any correspondence in which the debtor acknowledges the debt.
2. Demand performance in writing and set a deadline. A debtor is considered in breach where the creditor has demanded performance and set a reasonable deadline, and the debtor has not performed within it (Article 6.63(1)(4) CK). This matters especially where the contract sets no deadline: the debtor is then in breach only from the moment the creditor has demanded performance in writing and set a deadline, and the debtor has not performed within it (Article 6.63(3) CK). In our practice we send the demand by both email and registered post.
3. Decide what you want. Do you want the contract performed, or do you want to terminate it and get back what you paid? The content of your notice depends on this.
4. Go to court. When a court order is the right tool, when a full claim is needed, and what happens if the debtor still does not pay after judgment, we explain in Court order in Lithuania: court fee, interest and the bailiff and Debt recovery in court: limitation periods and documents.

How to start

Send us the contract, the unpaid invoices and your latest correspondence with the debtor. We will tell you whether it is worth terminating the contract, what you can claim and from whom.

Phone +370 5 212 1506, email info@linden.lt

More about this service: contractual disputes.