How to Recover an Advance Payment under a Contract for Work and Labour if the Work Has Not Been Performed

Legal Grounds for the Recovery of an Advance Payment under a Contract for Work and Labour

An advance payment under civil law is a prepayment under a contract that does not serve as a penalty (unlike a deposit). If the contractor fails to fulfil its obligations under the contract for work and labour, the amount of the advance payment is subject to recovery as the contractor’s unjust enrichment. The Civil Code of the Russian Federation does not directly contain a separate article governing the return of an advance payment by a contractor upon termination of a contract for work and labour. Therefore, general provisions of the law of obligations and the rules on unjust enrichment apply. In particular, paragraph 1 of Article 1102 of the Civil Code of the Russian Federation establishes the obligation to return property acquired or retained without legal grounds at the expense of another party.

When a contract for work and labour is terminated (for example, due to the customer’s withdrawal), there are no longer any grounds to retain the previously received advance payment. According to explanations provided by higher courts, from the moment the customer withdraws from the contract, the contractor’s obligation to perform the work transforms into a monetary obligation to return the received advance payment. In other words, funds received by the contractor in advance must be returned to the customer if the corresponding performance (work) has not been provided and the obligation to perform has ceased. The legal basis for this is found in Article 453 of the Civil Code of the Russian Federation, which regulates the consequences of contract termination (paragraph 4 of Article 453 allows for the recovery of amounts paid under a terminated contract), in conjunction with the rules on unjust enrichment.

It is important to distinguish an advance payment from a deposit or other security payments, as the rules for their recovery differ. If the contract does not explicitly state that the amount paid constitutes a deposit or security payment, it is deemed to be an advance payment (paragraph 3 of Article 380 of the Civil Code of the Russian Federation). This means that such funds do not serve a security function and must be returned if the obligation is not fulfilled. For example, under a contract of sale, the law directly provides that if the goods are not delivered, the buyer is entitled to claim back the prepayment (paragraph 3 of Article 487 of the Civil Code of the Russian Federation). By analogy, in contractual work relations, the retention of an unearned advance payment is regarded as unjustified retention of another’s funds.

Conditions and Circumstances in Which an Advance Payment Is Subject to Return

The recovery of an advance payment from the contractor is possible upon the occurrence of certain circumstances that indicate that the money received in advance was not “earned” by the performance of work. The main situations include the following:

1. Complete Non-Performance of Work by the Contractor

If the contractor fails to commence or perform the work within a reasonable time, the customer is entitled to claim back the advance payment. In particular, in cases of delay in starting or unreasonably extending the work deadlines, the customer may withdraw from the contract (paragraph 2 of Article 715 of the Civil Code of the Russian Federation) and demand the return of the advance payment. If the contractor unilaterally withdraws from the contract without having performed any work, the retention of the advance payment is also unlawful — the funds must be returned as unjust enrichment.

2. Partial Performance of Work

When the work is only partially performed, the advance payment must be returned in the portion that exceeds the value of the work actually performed and accepted. In other words, the unearned advance payment is the difference between the amount paid and the price of the completed and accepted work. This unused portion of the advance payment must be returned by the contractor after termination of the contract. For example, if the customer has made a prepayment but only a small portion of the work has been completed and not accepted, the customer may claim the return of the unused balance.

3. Poor-Quality or Useless Performance

If the contractor performs the work only partially, and the result does not meet the contract’s requirements and has no value for the customer (i.e. is unfit for use), the customer may refuse to accept such a result. In this case, the work is not subject to payment, and the advance payment is deemed unearned. According to many contractual terms, payment is made only for a result that has consumer or commercial value to the customer; otherwise, the contractor is obliged to return the amounts received.

4. Termination of the Contract for Work and Labour

In all cases where a contract for work and labour is terminated before full performance, the unearned portion of the advance payment must be returned. A unilateral withdrawal by the customer under Articles 715 or 717 of the Civil Code of the Russian Federation terminates the obligations, and the contractor is not entitled to retain the advance payment beyond the value of the work already performed. Even if the contract is terminated by mutual agreement, such agreement usually specifies the return of the advance payment or its offset against the payment for completed stages of work. If the contract is found invalid or not concluded, the advance payment must be returned in full, as there is no legal basis for its retention.

Summary of Common Situations and the Consequences for the Previously Paid Advance Payment

If the contract has not been terminated and the contractor has not formally breached its terms, the advance payment remains a means of securing payment for future work. Recovery of the advance payment is possible only upon termination of the obligation or in cases of clear non-performance by the contractor. If the customer themselves breaches the contract (for example, by failing to pay the full advance, delaying the provision of work access, etc.), this may deprive them of the right to claim the return of the advance payment.

Claims Procedure and Contract Termination

The pre-trial (claims) procedure for dispute resolution is a mandatory stage before filing a lawsuit in claims for monetary recovery between business entities. According to procedural legislation, before filing a claim for the recovery of an advance payment, the customer must send a written demand to the contractor requesting the return of the funds. Failure to comply with the mandatory pre-trial procedure may result in the claim being left without consideration.

A claim letter is drafted in free form but must include all essential details: the recipient (name of the contractor, name of the director, address, and company details), the sender (customer’s information), reference to the contract for work and labour, circumstances of the advance payment, and the grounds for its return (for example, contract termination or non-performance of the work, with references to legal norms and specific contract clauses). The letter concludes with a demand to return a specific amount of the advance payment within a specified deadline for voluntary repayment. The claim must be signed by an authorised representative of the customer and should be sent in a way that confirms delivery (by registered mail with an inventory of enclosures, via courier with signature confirmation, or by email if agreed between the parties).

Often, along with or parallel to the claim, the customer sends a notice of unilateral withdrawal from the contract (if such grounds are provided by law or the contract). In the event of significant violations by the contractor (failure to start work, missed deadlines, or obvious inability to perform the work properly), the customer is entitled to unilaterally withdraw from the contract under Article 715 of the Civil Code of the Russian Federation by sending a corresponding written notice to the contractor. The withdrawal may be executed by sending a written notification or by taking any other unequivocal actions demonstrating the intention to terminate the contract. If there are no grounds for withdrawal due to the contractor’s fault, the customer may still terminate the contract at any time before completion under Article 717 of the Civil Code of the Russian Federation (termination without cause), provided that the contractor is paid for the part of the work actually completed and reimbursed for proven expenses within the unfulfilled portion of the contract price. In both cases, the result is the termination of contractual relations and the emergence of an obligation to settle previously received advance payments.

When terminating a contract, this fact must be properly documented. If termination occurs by mutual agreement, a written termination agreement should be executed, specifying the amount to be refunded to the customer. If the contract is terminated unilaterally, a notice is sufficient; however, in contentious cases, the customer may ask the court to confirm the fact of termination.

From the date of contract termination (or the date the contractor receives notice of withdrawal), the statute of limitations begins to run on the claim for the recovery of the advance payment. This period is three years (the general limitation period), and if it expires, recovery may be denied if the other party invokes the limitation. Therefore, it is not advisable to delay formal termination of the contract and submission of claims.

Procedure for the Customer to Recover an Advance Payment

1. Analysis of the Situation and the Contract

First, the customer must assess whether the right to demand repayment of the advance payment has arisen: verify whether the contractor has completed the work fully or partially, whether there are delays or substantial breaches, and examine the contract for work and labour to determine whether an advance payment was stipulated, in what amount, whether it was called a deposit or a security payment, and whether the contract includes any special provisions regarding non-refundability. It is also important to confirm that the customer has fulfilled its obligations (for example, providing necessary documentation and paying the advance on time and in full) so that the claim for refund is legally justified. If the work was not performed or the contract failed, the customer has grounds to demand repayment.

2. Termination of the Contract and Documentation of Unperformed Work

At this stage, the customer brings the contract to termination—either by unilateral withdrawal (sending a notice under Articles 715 or 717 of the Civil Code of the Russian Federation, depending on the circumstances) or by executing a termination agreement with the contractor. At the same time, it is necessary to document the amount of work actually performed (if any). It is advisable to draw up a reconciliation statement or an inspection report reflecting what work was completed, its value, and which part of the advance remains unearned.

In construction contracts, this often involves an on-site inspection: the customer invites the contractor to the construction site to jointly verify and document the volume of work performed and the remaining uncompleted work. If the contractor fails to appear, the inspection may be carried out with the participation of an independent expert or witnesses, supported by photographs, cost estimates, and reports — all of which may serve as evidence in court.

The result of this stage should be a clear understanding of the amount subject to refund (the full advance payment or part of it).

3. Pre-Trial Claim to the Contractor

Once the customer has confirmed the grounds for recovery, a written claim (demand) for repayment of the advance payment should be sent. The claim must state the facts of the case: when and under which contract the advance was paid, why the contractor is obliged to return it (for example, because the work was not performed or the contract was terminated), with references to the relevant articles of the Civil Code of the Russian Federation and contractual provisions. The demand must specify the exact amount to be returned within a certain period and include the customer’s bank details for refund. The claim should be delivered against the signature of the contractor’s authorised representative or sent by registered mail.

Under the law on pre-trial procedure, the contractor generally has 30 days to respond to the claim from the date of receipt unless a different period is specified in the contract. If no response is received or the contractor refuses to comply, the customer may proceed to court.

4. Filing a Claim with the Arbitrazh (Commercial) Court

The customer files a statement of claim with the arbitrazh court (at the contractor’s registered location or as provided by the contract’s jurisdiction clause). The claim must request recovery from the contractor of the unearned portion of the advance payment. The legal qualification of such a claim is typically as the recovery of unjust enrichment (Article 1102 of the Civil Code of the Russian Federation) arising due to the termination of the contract. Alternatively, it may be argued as damages suffered by the customer, but courts usually consider it as unjust enrichment, since the obligation to return the advance payment directly results from prepayment made without subsequent performance.

The claim should describe the relevant circumstances: conclusion of the contract, payment of the advance (attach payment orders), execution progress (or lack thereof), submission of the pre-trial claim, and refusal to refund. Evidence of the work performed (or non-performance) should also be attached: acts, correspondence, photographs, expert reports, etc. The claim must explicitly state that the contract has been terminated (attach the termination agreement or notice of withdrawal with proof of delivery). The amount of the claim equals the sum to be recovered.

In addition, the customer has the right to claim interest for the use of another’s funds (under Article 395 of the Civil Code of the Russian Federation) on the amount of the advance payment for the period during which the contractor unlawfully retained it. Interest is usually calculated from the day following the contract’s termination (or after the deadline set in the claim for repayment) until the day of actual payment. If the claim is upheld, the court will award the amount of the advance payment (in full or in part, depending on the evidence), interest, and reimbursement of the state duty.

5. Enforcement of the Court Decision

After obtaining a court decision ordering repayment of the advance payment, the customer proceeds to the enforcement stage. If the contractor fails to pay voluntarily within the prescribed period (usually one month after the decision enters into force), the customer receives a writ of execution. The customer may then either send it directly to the contractor’s bank to recover the funds from the account or submit it to the Federal Bailiff Service (FSSP) for compulsory enforcement.

The enforcement process may include coercive measures such as the freezing of bank accounts and assets, seizure of funds, or enforcement against property (in accordance with the Federal Law “On Enforcement Proceedings”). The customer may also request measures such as asset tracing or prohibitions on registration actions. If the contractor lacks sufficient funds or property, bankruptcy proceedings may be initiated to include the claim in the register of creditors.

Nevertheless, obtaining a court decision provides a lawful basis to demand repayment, and most organisations prefer to settle the debt voluntarily before more severe enforcement measures are applied.

Specifics of Recovering an Advance Payment under a Construction Contract

A construction contract has certain peculiarities that affect the procedure for settlements when returning an advance payment. Firstly, the advance in construction is usually substantial and is often issued for the purchase of materials, equipment, and the mobilisation of machinery. Therefore, when a construction contract is terminated, it is important to resolve the issue regarding the materials and assets purchased with the advance payment. If the contractor has purchased materials using the advance funds, the client has the right to demand either the transfer of these paid materials or the return of the monetary equivalent of the unused portion of the advance. The Civil Code requires the contractor, upon termination, to return to the client all property belonging to the latter—such as provided materials, equipment, etc.—or to reimburse their value if physical return is impossible.

Secondly, in construction works, payment by stages based on acceptance certificates (forms KS-2 and KS-3) is customary. The advance payment is typically offset against subsequent work and closed through these certificates. If, at the time of termination, certain certificates of completed work have been signed, it means that the corresponding part of the work has been accepted and paid for—the advance payment for that portion cannot be reclaimed since the funds are not unjustified (they have been worked off through the result accepted by the client).

A distinctive feature of construction contracts is that a client who signs the acceptance certificates without comments effectively agrees with the scope and quality of the work. Therefore, it is not advisable to sign certificates of completed work if there are any claims regarding quality or scope—otherwise, it will be difficult to prove later that the work performed does not justify the sums paid.

Another important aspect is the accurate accounting and confirmation of the scope of incomplete work. Upon termination of a construction contract, it is often necessary to conduct a construction expert examination or prepare a detailed cost estimate to determine the actual value of the work performed and the portion of the advance payment that remains unused. The contractor must be notified in advance of the inspection and invited to send a representative.

Joint documentation of the results (or documentation with proper notification of the contractor) gives the inspection report greater evidentiary value. The report or expert opinion should reflect the overall percentage of project completion, the list and cost of completed work, and the list of unperformed work. Based on these data, the amount of the unworked advance to be returned is determined. For example, if the advance constitutes 30% of the contract price, and only 10% of the work has been completed according to the cost estimate, then approximately 20% of the price constitutes an overpayment subject to reimbursement to the client.

Finally, it should be considered that construction-related disputes often involve mutual claims. The contractor may attempt to prove that the advance was spent on preparatory work not visible in the final result (for instance, project documentation, equipment transportation, or certain concealed works). The client should insist on documentary evidence of such expenses. If such evidence is not provided, the court will consider the portion of the advance exceeding the value of visible completed work as unutilised and subject to return.

Possible Complications When the Contractor Refuses to Return Funds

1. Disputes over the amount of work performed

The contractor may disagree with the calculation of the unworked portion of the advance, claiming that a larger volume of work was completed than acknowledged by the client. The contractor may submit acceptance certificates, cost summaries, photographs of completed stages, and similar evidence. A dispute then arises regarding what portion of the advance truly remains unutilised. To overcome this, the client should have its own evidence—inspection reports, expert conclusions, correspondence acknowledging delays, and so forth.

2. Contesting the legitimacy of contract termination

The contractor may claim that the client terminated the contract without sufficient grounds. For example, there may be a dispute over whether there was an actual breach of deadlines or whether the contractor managed to complete the work. If the court finds that the client’s unilateral termination was unlawful, this will complicate the recovery of the advance. Therefore, it is important to document the grounds for termination—prepare reports of violations, issue notices specifying the breaches and referring to Article 715 of the Civil Code of the Russian Federation, include photographs of defects, etc. In cases of unmotivated refusal (under Article 717 of the Civil Code of the Russian Federation), the contractor may claim damages, such as lost profits for the remaining portion of the work. Such claims may be filed as a counterclaim, thereby reducing the amount subject to return.

3. Reference to contractual terms

Some contractors include provisions in contracts stating that the advance payment is non-refundable if termination occurs at the client’s initiative or that it may be offset against penalties. In commercial relations, such conditions are generally permissible (unlike in consumer contracts). The court will assess these provisions for compliance with law and principles of reasonableness in each case. However, it is advisable for the client to ensure that the contract does not contain non-refundable advance clauses without reciprocal guarantees. If such a clause exists, the client will need to prove that the contractor incurred no actual expenses, or that the non-refundable clause is, in effect, a penalty and should be proportionally reduced.

Additionally, the contract may stipulate that the advance serves as security and may be retained as a penalty for the client’s breach—for instance, in case of unilateral withdrawal without contractor fault. In such a case, the contractor may theoretically retain a portion of the advance to cover its losses. The resolution of such disputes will depend on the specific wording of the contract and the circumstances of termination.

4. Contractor’s financial insolvency

Often, the issue of returning an advance arises not only from legal positions but also from the contractor’s lack of funds. If the contracting organisation is in financial distress or near bankruptcy, even with a favourable court decision, the client may face difficulties recovering the funds. The contractor may avoid execution, hide assets, or delay payments. In such cases, the client should request interim measures—such as freezing the contractor’s bank accounts or assets during litigation—to secure future enforcement.

If a judgment has already been issued and the debtor refuses to pay, the client should actively engage with enforcement officers: identify accounts and property, and seek restrictions on the debtor. In extreme cases, the client may initiate bankruptcy proceedings against the debtor, although this involves additional costs and time.

5. Expiration of the limitation period

As a general rule, the limitation period is three years from the date the client learned or should have learned of the violation of its right (for the return of an advance—typically from the date of contract termination or refusal to perform). If this period has elapsed, the contractor may invoke the limitation period in court, leading to dismissal of the claim regardless of its merits.