In the ever-changing business environment, there are frequent cases when one business entity supplies products/services to another entity. The latter either avoids or unreasonably delays the fulfillment of its obligations under the contractual relationship.
Accounts receivable is a company’s claim that arises for many different reasons when dealing with individuals or legal entities, mainly as a result of the following contractual relationships – delivery of products, performance of work, provision of services, advances paid to suppliers, loans granted, etc. The company has the right to claim accounts receivable in the event of a breach of a monetary obligation assumed by the other party to the company.
First of all, it should be noted that the Civil Code recognizes and is based on the principle of “pacta sunt servanda” (contracts must be fulfilled), according to which a party to a contract who has assumed an obligation must fulfill the rights and obligations agreed upon in the contract of his own free will.
The obligation to perform primarily implies the occurrence of the result stipulated by the contract. At the same time, in the event of non-fulfillment of the primary obligation, an obligation to perform the work (compensation for damages, punitive damages) arises.
According to Article 361, Part 2 of the Civil Code, an obligation must be performed properly, in good faith, at the appointed time and place. Failure to fulfill these requirements is a breach of the obligation.
Civil legislation, in order to prevent the violation of obligations, provides for legal means of securing the claim and obligations. The aforementioned serve to fulfill the obligation and the choice depends on the will of the parties. (Court of Civil Procedure of 25.05.2010, Case No. AS-1220-1480-09).
In order for the creditor to bring claims against the debtor arising from an unfulfilled obligation, there must be a legal basis for the occurrence of the obligation, for example, a contract. In practice, there are cases when the parties have reached a certain agreement and concluded a contract, however, at the stage of the dispute, the debtor questions the creditor’s performance under the contract and believes that he has no obligation to perform in response. For example, in one of the cases, a lease agreement was concluded between the parties on movable property, on the basis of which the lessor transferred movable equipment to the lessee for temporary use to carry out certain works. According to the lessor, the value of the lease in exchange for the use of the movable equipment by the lessee amounted to 16,000 GEL. The lessee, in turn, argued that the lessor had not provided him with any services, which precludes the satisfaction of the claim for compensation.
In the above case, the lessor presented evidence, including payment invoices, to prove that it had performed its obligation under the contract in good faith and that, as a creditor, it had a legal basis for making a claim against the debtor, while the debtor, in turn, indicated that the payment invoice is relevant only in relations with the state budget and cannot be used as evidence in civil disputes. In the above case, the court explained that the invoice, taking into account its form and content, meets the criteria for written evidence established by Part 1 of Article 134 of the Civil Procedure Code (written evidence shall be acts, documents, business and personal letters containing information about circumstances important to the case) and the law does not contain any prohibition in this regard. Accordingly, the Appellate Chamber considered that the invoice, as a document issued by an entrepreneurial entity, can be used in a civil dispute as written evidence if it contains information relevant to the case. (Case No. AS-752-2022) Accordingly, in the above case, the court accepted the payment invoices as written evidence and, on its basis, ordered the debtor to pay the full amount of the lease in favor of the creditor.
Based on the purchase (supply) agreement, in one of the cases, the defendant argued that the court should have allocated the burden of proving the delivery of goods to the plaintiff. In addition, the mere existence of a tax invoice and a waybill does not prove the conclusion of a purchase agreement and the existence of an obligation. (See case No. AS-249-2022)
In the case, the Cassation Chamber indicated that an electronically confirmed tax invoice fully confirms the fact of receipt of the goods by the buyer and, in the absence of a qualified dispute, gives rise to the obligation to pay the price. In one of the cases, the Cassation Chamber explained that in the circumstances when the defendant confirmed the invoice issued by the plaintiff, it is understood that a legal relationship with obligations arising from the purchase agreement has arisen between the parties. The service of tax invoices includes a set of complex processes for the supply of goods and services, which are interconnected by a logical chain. Both the issuer of the bill of lading, tax invoice (seller), as well as the recipient (buyer) and an employee of the Revenue Service participate in these processes. When the invoice is confirmed by the buyer, we can safely assume that he has purchased the delivered goods, since the invoice is sent directly to the buyer and its confirmation is not accessible to any third party. When issuing and confirming the invoice, the parties determine the date of commencement of transportation of the goods, acknowledge the delivery of the goods and their receipt (see, Case No. AS-381-381-2018, ruling of May 4, 2018).
In addition to imposing an amount based on the main obligation, creditors additionally demand from debtors an assessment of damages and an amount based on the means of securing the claim provided for in the agreement in order to prevent the breach of the obligation. In such cases, the provision of a penalty in the agreement is one of the most widespread means. When determining the amount of a penalty, attention is paid to several circumstances: a) the function of the penalty, as an instrument of a sanction nature, to prevent additional acts violating the obligation; b) the severity and scope of the violation and the degree of danger posed to the creditor; c) the degree of culpability of the person violating the obligation; d) the function of the penalty, to include compensation for damages. The Cassation Chamber explains that a penalty is a means of ensuring the relevant interest of the party in the performance of the obligation, the origin of the obligation to pay which is related to the breach of the obligation. The right to demand a penalty is independent of the proof of the fact of causing damage, that is, in order to demand a penalty, the creditor is not obliged to prove the damage caused. The creditor always has the right to demand a penalty, regardless of whether he has suffered damage or not. The main thing is the fact of breach of obligation. The right to demand a penalty and the right to demand compensation for damage, despite the fact that they are aimed at satisfying the same interest of the creditor, remain independent claims (see case No. AS-1747-2019).
In addition, it is important that there is a record of the penalty in the contract itself and/or even in the agreement on the recognition of the debt by the debtor. In one of the cases, the debtor acknowledged the existence of a debt arising from the contract, but did not express in writing his readiness to pay the penalty accrued due to the breach of the obligation. In the disputed case, the creditor demanded from the debtor the payment of both the principal amount and the penalty accrued on it. In the aforementioned case, the Supreme Court made the following clarifications: The purpose of the penalty is to include this amount in the calculation of the minimum damage for the breach of the obligation. By its functional purpose, the minimum damage does not represent full compensation for the damage actually received, but rather it is the amount that ensures the minimum satisfaction of the creditor’s claim, which is precisely what justifies the contractual nature of the penalty, i.e. for the imposition of a penalty, it is mandatory for the parties to reach an agreement in the appropriate form. With the termination of the obligation, the imposition of a penalty is also terminated, and its amount is calculated based on the period that has passed from the date of the performance deadline to the actual performance. The court established the circumstance that he did not express his willingness to pay the penalty, and the payment of the lease rent cannot be used as a basis for the obligor to recognize the means of securing the claim.
Based on all of the above, we can conclude that at each stage of the emergence of a legal relationship between the parties, in order to fully, unhinderedly and maximally insure their rights and risks, the party should be provided with appropriate qualified legal assistance. In addition, each business entity, when carrying out any business activity, should try its best to act in such a way as to have as many protection mechanisms as possible, so that in the event of a violation of its rights in the future, it can fully protect its interests.
