Facts
First Supreme Court decision
Second Supreme Court decision
Facts
In May 2006 two companies entered into a long-term contract whereby the respondent agreed to install fire safety systems in buildings specified by the claimant. However, the director and representative of the claimant at the relevant time was also one of the respondent's shareholders. The contract was unfavourable to the claimant, since installation of fire safety systems was the claimant's area of expertise - it was capable of providing such services and did not need to purchase them from a third party.
The claimant brought an action before the Vilnius Regional Court for annulment of the contract, claiming that it was the result of a wrongful agreement between the claimant's representative and the respondent. The claimant also sought restitution.
The court held that there were insufficient grounds to find that the disputed contract constituted a wrongful agreement. The Court of Appeal upheld the decision. The case was appealed to the Supreme Court.
First Supreme Court decision
The Supreme Court found that there were sufficient grounds to hold that the contract was the result of a wrongful agreement. It therefore reversed the decisions of the lower courts. The Supreme Court concluded that since the contract was formed on the basis of a wrongful agreement, the respondent was required to reimburse the claimant - the Civil Code requires that all moneys received under the contract be reimbursed in such cases. The Supreme Court remanded the case to the Court of Appeal for a decision on the amount of reimbursement.
The Court of Appeal, basing its decision on the Supreme Court's findings, applied unilateral restitution. Therefore, the respondent had to reimburse the claimant fully under the contract, while receiving no reimbursement itself. The respondent appealed to the Supreme Court.
Second Supreme Court decision
The respondent argued that Court of Appeal has misapplied the order for restitution and had strayed from the essential purpose of such a measure - that is, to restore the parties to the situation that existed before they entered into the contract. Applying the principle of restitution as the Court of Appeal had done resulted in the claimant's situation being unjustly improved to the unjust detriment of the respondent.
The Supreme Court rejected this assessment. It held that in the event of a wrongful agreement, the representative of one party acts unlawfully and in bad faith, as does the other party; therefore, neither should benefit from the unlawful conduct. The purpose of restitution in such cases is to limit the ability of a party acting with wrongful intent and in bad faith to benefit from such conduct. Consequently, such a party must fully reimburse its contractual counterparty under an annulled contract, whereas a party that has acted in bad faith should not be reimbursed.
Therefore, the Supreme Court upheld the Court of Appeal decision.
For further information on this topic please contact Dalia Foigt at Borenius / Švirinas & Partners by telephone (+370 5 264 95 55), fax (+370 5 260 83 27) or email ([email protected]).