On 25 February 2025, the Supreme Court of the Republic of Azerbaijan rendered a significant decision establishing uniform judicial practice on the obligations of construction developers. This article sets out an explanation of that decision, its legal significance, and its practical implications.
On 25 February 2025, the Supreme Court of the Republic of Azerbaijan issued a significant decision establishing uniform judicial practice. This article sets out an explanation of that decision, its legal significance, and its practical implications.
The Claimant was the owner of a detached residential dwelling with a registered floor area of 16.3 sq.m. Under an agreement concluded on 22 February 2018, the Claimant undertook to transfer that property to the Defendant for demolition, and the Defendant undertook to provide the Claimant with a fully renovated apartment of 19.6 sq.m. in the multi-storey residential building to be constructed on the same plot of land.
In addition, the Defendant was obliged to pay the Claimant AZN 300 per month as rent until the apartment was handed over. The construction works were to be completed within 24 months of the foundation being laid, after which the apartment was to be delivered to the Claimant.
Despite seven years having elapsed since the conclusion of the agreement, the Defendant had not delivered the apartment to the Claimant.
The Claimant brought proceedings seeking an order requiring the Defendant to provide a fully renovated and title-registered apartment in the newly constructed building pursuant to the agreement. The Claimant further sought recovery of unpaid rent accruing from November 2023 until the date of delivery of the new apartment, as well as AZN 7,000 in respect of household items damaged when moving between rental properties, AZN 20,000 in compensation for non-pecuniary (moral) damage, and all legal costs incurred in the proceedings.
In response, the Defendant contended that the building’s project did not include an apartment corresponding to the floor area specified in the agreement and that performance of its contractual obligation had therefore become impossible. On that basis, the Defendant applied to the court for the agreement to be terminated on grounds of impossibility of performance.
The court of first instance ordered the Defendant to deliver the apartment to the Claimant, to continue paying rent from November 2023 until the date of delivery, and to pay AZN 500 in compensation for non-pecuniary damage together with AZN 100 in state duty.
The Defendant appealed, seeking reversal of that judgment on the ground that enforcement would be impossible even if the judgment were to take effect. The Court of Appeal found that the constructed building did not contain an apartment matching the contractual specification and, noting that the smallest apartment in the building was 54.1 sq.m., concluded that it was impossible for the Defendant to provide the Claimant with an apartment of the stipulated size. The Court of Appeal further held, by reference to the definition of “apartment” under the Housing Code of the Republic of Azerbaijan, that the construction of a separate residential unit of only 19.5 sq.m. was not permissible, and accordingly terminated the contractual obligation. The rental payment obligation was also terminated on the ground that it was not an independent obligation but an ancillary one, accessory to the primary obligation to deliver the apartment.
On the Claimant’s cassation appeal, the Supreme Court concluded that the substantive law had not been correctly applied in the proceedings below.
The Supreme Court noted that the validity of the agreement between the parties was not in dispute. Under that agreement, the Defendant had undertaken to provide the Claimant with a fully renovated apartment of 19.6 sq.m. in the building to be constructed on the site of the demolished dwelling, of which the Claimant was a co-owner. The Defendant had failed to perform that obligation, citing the absence of an apartment of that size in the building.
Since the Court of Appeal had treated the obligation as impossible to perform, the Supreme Court considered it necessary to examine and clarify the legal concept of impossibility of performance.
In the Supreme Court’s view, impossibility of performance is divided into two categories: initial impossibility and subsequent impossibility. Initial impossibility arises from circumstances that existed prior to the conclusion of the contract. Subsequent impossibility, by contrast, arises after the contract has been validly concluded, in the course of performance.
Subsequent impossibility is itself further divided into: subsequent culpable (fault-based) impossibility and subsequent non-culpable (no-fault) impossibility.
Where performance has become permanently and definitively impossible after the conclusion of the contract due to circumstances attributable to the debtor’s liability, this constitutes subsequent culpable impossibility, which amounts to a breach of obligation by the debtor. Moreover, if the debtor knew, or ought to have foreseen, at the time of contracting that performance would subsequently become impossible, the debtor is likewise treated as being at fault and is not relieved of liability towards the creditor.
Where impossibility of performance is attributable to the debtor, the obligation is not extinguished. On the contrary, the debtor remains fully liable to the creditor for all adverse legal consequences arising therefrom.
The legislature has also imposed an additional duty on the debtor in certain cases where impossibility of performance arises through no fault of the debtor: the debtor must promptly notify the creditor of circumstances of impossibility of which it is or should be aware, so as to prevent the creditor from sustaining further loss. Failure to do so renders the debtor liable to compensate the creditor for such additional loss.
Accordingly, subsequent culpable impossibility, which does not extinguish the obligation, must not be conflated with subsequent non-culpable impossibility, which does; the two must be distinguished on the basis of their legal nature and consequences.
In the present case, the Court of Appeal failed to draw this distinction correctly, and did not establish, with adequate reasoning, that the Defendant’s inability to deliver a fully renovated 19.6 sq.m. apartment arose from circumstances beyond its control. First, with regard to the concept of “apartment” under the Housing Code, the Supreme Court noted that the minimum floor area taken into account for the purposes of determining the total area of a residential unit under the relevant legislation is 16 square metres.
Furthermore, the Court of Appeal overlooked the fact that the obligation to construct and deliver to the Claimant an apartment of the contractually agreed size fell within the Defendant’s sphere of risk. As is well established in judicial practice and as follows from the nature of commercial dealings, every construction company knows and is expected to know the floor areas of the apartments projected in the buildings it intends to construct. A construction company enters into agreements with clients on the very basis of those project specifications and assumes the corresponding obligations. It is therefore liable for the accuracy and enforceability of information relating to apartment areas, whether provided by its legal representatives or by other persons it employs. Such liability is not discharged by the fact that the apartment area was incorrectly stated in the contract, that a smaller area was specified than that of the smallest apartment to be built, or that the design and planning documents were subsequently amended.
It follows that a contractual obligation cannot be terminated on grounds of impossibility of performance unless the debtor demonstrates that it was unable to perform due to an objectively insurmountable circumstance beyond its control, and that it had neither the capacity to anticipate, prevent, or remedy that circumstance at the time the contract was concluded.
Subsequent culpable impossibility of performance does not relieve the Defendant of liability and does not constitute grounds for termination of the obligation. On the contrary, the Defendant remains fully bound by the obligations it undertook towards the creditor and is liable for any loss arising from its acts or omissions.
Client and developer companies engaged in construction projects are obliged to perform their contractual obligations in good faith. This entails creating the conditions necessary for performance, conducting a prior assessment of foreseeable risks, and taking steps to mitigate them. Such entities must equally refrain from any act or omission that may give rise to culpable impossibility of performance.
In conclusion, culpable impossibility of performance does not provide a legal basis for termination of an obligation. Compliance with contractual terms is therefore of paramount importance, both legally and commercially; failure to do so may expose the parties to additional legal liability and financial risk.
Reach us via [email protected] for any construction law question in Azerbaijan!
Is it sufficient for such an agreement to be executed in simple written form, or is notarization ...
Inflation of Money as Damage: The Legal Position of the Constitutional Court
The liability of employees towards employer and its documentation form caused confusion. The Cons...