Contractor Agreement

By a contractor agreement the contractor undertakes to manufacture or modify a thing or to achieve any other agreed result by providing a service (work), and the customer undertakes to pay a fee for that (also contract for services). The Avokaado Contractor Agreement can be used if:

  • the aim of the contract is to manufacture a thing or achieve an agreed result
  • the customer pays a fee for performing the contract
  • the contractor is a natural person or a legal person

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Frequently asked questions

What distinguishes the contractor agreement from ordinary employment contract?

A contractor agreement and an employment contract are similar at first sight, but they differ in the rights and obligations of the parties and in liability. A contractor agreement can be entered into orally. However in order to avoid disputes, it’s wise to enter into the contract in writing. By a contractor agreement, the contractor undertakes to manufacture or modify a thing or to achieve any other agreed result by providing a service, and the customer undertakes to pay remuneration therefor.

An employment contract is an agreement between an employee and an employer in which the employee undertakes to work for the employer under its control and the employer undertakes to pay for such work. An employment contract always has to be entered into in writing. Employment contracts are regulated by the Employment Contracts Act, by which an employee has numerous benefits and guarantees which don’t apply to the contractor agreement (for example the right for rest time, minimum wage etc).

Based on the employment contract, the employee must usually perform the contract personally. However in case of a contractor agreement the contractor may use third persons to perform the contract. An employment contract can only be entered into with a natural person. A contractor agreement can also be entered into with a legal person. It should be noted that § 1 (2) of the Employment Contracts Act imposes a presumption that if a person does work for another person which, under the circumstances, can be expected to be done only for remuneration, it is presumed to be an employment contract. This means that in case of a dispute both parties have the obligation to prove that it is a contractor agreement, if they wish to apply the regulations regarding the contractor agreement from the Law of Obligations Act.

What distinguishes the contractor agreement from the service agreement?

By a contractor agreement, the contractor undertakes to manufacture or modify a thing or to achieve any other agreed result by providing a service. The main way to distinguish the contractor agreement from the service agreement is the fact that the contractor agreement is targeted towards achieving a specific result which has to be achieved by the contractor. This means that the contractor is liable for not achieving the specific result.

A service agreement is targeted towards providing a service when the result is not directly linked with the service provider (for example a contract with an attorney for court representation or accounting services). Although the contractor agreement is not directly result oriented, the service provider is obligated to make reasonable efforts, i.e. the service provider has to make efforts like a similar person in the same economic or professional activity would act under the same circumstances. This means that the service provider is not liable when the specific result is not achieved, but he performed by the reasonable estimate.

In the case of a contractor agreement the contractor is obliged to achieve a specific result and if he does not achieve that result it’s deemed to be lack of conformity with the contract and the contractor must remove the defects or pay damages.

Does the contractor have to carry out the work personally?

It is usually presumed that the contractor does not have to carry out the work personally. However the parties may agree otherwise. In case the contractor does not carry out the work personally, he is still obliged to ensure that the work is in compliance with the contract.

The contractor must carry out the work personally only if the customer has a reasoned interest that the work must be carried out by the contractor personally.

What are the delivery and acceptance of goods?

In order to perform the contractor agreement the work has to be delivered to the customer. In order to deliver the goods the contractor and the customer must sign the delivery-acceptance document. If need be, the customer may note the possible defects in this document.

The customer is obligated to accept the work when it’s ready. The customer does not have to accept the work earlier than the date specified in the contract. The aim of this is that the remuneration falls due when the work is accepted and therefore it may be unreasonably burdensome for the customer if the remuneration for the work falls due earlier than originally planned.

The work is deemed to be accepted even if the customer refuses to accept the work without any basis during a reasonable time given by the contractor. However if the customer accepts the work, it does not mean that the customer is also pleased with the work. The customer has the right to demand removal of defects or compensation for damage if the contractor is liable for lack of conformity.

What is the lack of conformity?

Work and documents accompanying work need to conform to the contract. Work does not conform to the contract if, among other things:

  • the work does not have the agreed qualities;
  • in the absence of an agreement concerning the qualities of the work, the work is not fit for the specific purpose for which the customer needs it and of which the contractor was aware or ought to have been aware at the time of entry into the contract if the customer could reasonably have expected to be able to rely on the professional skills or expertise of the contractor, and in other cases for the purpose for which work of the same description would ordinarily be used;
  • the use of the work is hindered by provisions of legislation of which the contractor was aware or ought to have been aware at the time of entry into the contract;
  • third parties have claims or other rights which they may submit with respect to the work;
  • under a consumer contractor agreement, the work is not of the quality which is usual for such type of work and which the customer may reasonably have expected based on the nature of the work and considering the declarations made publicly by the contractor with respect to the particular qualities of the work, in particular in advertising the work or on labels, unless the contractor proves that the declarations had been modified by the time of entry into the contract or that the declarations did not affect entry into the contract. 

What is a contractual penalty?

A contractual penalty is an obligation which is prescribed in the contract and under which the party which fails to perform the contract undertakes to pay an amount of money determined by the contract to the injured party. The aim of a contractual penalty is to affect a party to perform the contract and to refrain from violating the contract. Also, the contractual penalty simplifies receiving remuneration for damages. However in case of a contractual penalty claim there is no obligation to prove the existence of damage.

If a contractual penalty to be paid is unreasonably high, the court may reduce the penalty to a reasonable amount at the request of the party obligated to pay the penalty, taking into particular account the extent to which the obligation has been performed by the party, the legitimate interests of the other party and the economic situation of the parties. A party obligated to pay a contractual penalty does not have the right to require a reduction of the penalty after the party has paid the penalty. An injured party loses the right to claim payment of a contractual penalty if the party fails to notify the other party during a reasonable period after becoming aware of the non-performance that the party is claiming payment of the contractual penalty.

What happens if the contractual penalty does not cover all the damages?

If a contractual penalty is agreed upon for the occasion of non-performance of an obligation, the injured party may claim performance of the obligation in addition to payment of the contractual penalty. Performance of the obligation in addition to payment of a contractual penalty shall not be claimed if the contractual penalty was agreed upon as a substituted performance and not as a measure for achieving performance. If an injured party has the right to claim compensation for damage incurred due to non-performance of the contract, compensation shall be paid to the extent not covered by the contractual penalty.

Can the parties cancel the contract?

The Law of Obligations Act states that a customer has the right to cancel a contractor agreement at any time. If the customer has cancelled the contractor agreement, the contractor has the right to demand payment of the agreed remuneration from which the savings made by the contractor due to the cancellation of the contract and anything which the contractor obtained or could reasonably have obtained by using the labour force thereof for different purposes are deducted.

The contractor may cancel the contract in two cases pursuant the contract. Firstly, when the customer is obligated to pay remuneration for the work stepwise and the customer has been in delay with the last payment over 2 weeks. Secondly, when completing the work is impossible for reasons arising from the customer

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