Legal Alert – Borenius’ Client Wins a Supreme Court Case Regarding a Set-off of Building Contract Receivables in Bankruptcy (KKO 2015:85)
The Finnish Supreme Court issued a ruling on 18 November 2015 regarding the set-off of a building contract receivable in contractor’s bankruptcy. In 2010, a mutual real estate company (MREC), represented by Borenius, and a contractor signed a building contract under which the parties agreed that the widely used General Conditions for Building Contracts (YSE 1998) were to be applied to the contract. However, after the construction work was started, the contractor neglected to follow the construction schedule as a result of which the MREC terminated the building contract. Under a specific provision in the YSE 1998, the MREC had the right to take the site and the construction goods owned by the contractor into its possession, and soon after this, the contractor went bankrupt.
The MREC claimed receivables of EUR 1.2 million from the contractor’s bankruptcy estate for damages caused by the contractor’s breach of contract and delay. The MREC also invoked that it may set off the value of the construction goods it had taken into its possession against the receivable of EUR 1.2 million. The bankruptcy estate dismissed the MREC’s request for set-off and claimed that the MREC did not have the right for set-off since the YSE 1998 provision allowing this contradicted with the Finnish Bankruptcy Act (120/2004).
The MREC filed a suit with the District Court of Helsinki requesting that the court confirms that the MREC has the right to set off the construction goods against the damages. The District Court affirmed the MREC’s request for confirmation, and the bankruptcy estate subsequently filed an appeal for a precedent before the Supreme Court.
The Supreme Court granted a leave to appeal, but upheld the District Court’s judgment. The Supreme Court noted that Chapter 6, section 2 of the Finnish Bankruptcy Act provided that a creditor does not have the right to set off a receivable if the arrangement has been made in circumstances comparable to a payment made by the debtor. According to preparatory legislative material, the provision could be applied where a creditor purchases something from their debtor on credit, and would then set off this receivable against the new debt. The Supreme Court also noted that the provisions of the Bankruptcy Act were compelling, and that the YSE 1998 could thus not be applied if they were found to contradict with the Finnish Bankruptcy Act.
The Supreme Court concluded that the MREC already had a receivable from the contractor when it took the construction goods into its possession, i.e. when its debt to the contractor came into existence. It also noted that the YSE 1998 provision that allowed the MREC to take the site into possession was primarily intended to ensure that construction work could be completed in a timely manner. Thus, the Supreme Court found that the debt had not been created artificially, stating that the building contract was terminated at a stage where the construction work was already significantly delayed. Therefore, the court found that Chapter 6, section 2 (3) of the Finnish Bankruptcy Act did not apply to the case at hand, and the MREC was allowed to set off the debt against its receivable.