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Contractual penalty

Contractual penalty

Contractual penalty is defined in article 483 of Civil Code, which states that it is possible to reserve the right to claim compensation of damages stemming from non-performance or improper performance of non-pecuniary obligation will be effected by payment of a specified amount (contractual penalty).

From the above definition stems that firstly to talk about contractual penalty it has to be clearly stated in the contract and its value has to be clearly defined or at least conditions necessary to establish its height. Secondly it can only be reserved in case of non-performance or improper performance of non-pecuniary obligation. Thirdly it can only compensate the damage stemming from non-performance or improper performance of non-pecuniary obligation by the debtor.

The amount of the contractual penalty

Above mentioned article strictly requires that the contractual penalty was a fixed amount. It doesn’t mean that it is necessary to specify the nominal amount of the penalty, although it is possible. Correct would also be to define conditions necessary to establish its value, such as a percentage of a final remuneration or a specified amount multiplied by days of delay.

It should be remembered that according to article 484 § 2 of Civil Code if the obligation was performed in significant part, the debtor may demand the reduction of contractual penalty; the same refers to the situation when the penalty is grossly excessive. The assessment whether the obligation was fulfilled in significant or insignificant part as well as if the penalty is grossly excessive depends each time on court’s decision, however it can always be subject to negotiations between the parties. It is assumed, however, that the penalty is excessive when the disproportion between the contractual penalty and the violation is obvious to any observer. It should also be remembered that in case of partial performance of obligation the reduction of the penalty is not possible in case of indivisible obligations.

Contractual penalty and type of obligation

From article 48s it stems that, the contractual penalty may be reserved only in relation to non-performance or improper performance of non-pecuniary obligation. As a rule it may not secure the possible delay in payment as this function is generally borne by the interest. Such improper tactic is often used by the banks, which stipulate the obligation to pay a contractual penalty in case of delay in settling the debt. Such provisions are invalid, as it is not possible to change this law rule by the agreement between the parties. Note, however, that in certain circumstances the payment of such penalty may be reckoned as an admission of the claim and request for a refund may not be possible.

Contractual penalty and damage

Article 484 § 1 kc of Civil Code states that in case of non-performance or improper performance of an obligation the creditor may claim the contractual penalty in the amount agreed between the parties in the contract regardless to the value of the damage. Claiming the damages in the amount exceeding such agreement is not possible unless parties agreed otherwise.

From the above mentioned stems, that contractual penalty is due also it the nominal value of the damage is zero. This issue is disputed in practice and the courts usually take the intermediate position, depending on the specific facts of the case. In its adjudication of 14 October 2015 (V CSK 32/15) the Supreme Court stated that, the statement that no nominal value of the damage does not absolve the debtor from the obligation to pay a penalty, does not mean that the relationship between the amount of damage and the amount of the contractual penalty does not matter to the possibility of reducing a contractual penalty.