Contractual penalty - when to apply it in the contract?

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Contractual penalty allows to secure the durability of the contract and performs a protective function of the enterprise in the event of non-performance or improper performance of a non-pecuniary obligation by the contractor.

What is contractual penalty?

What is a contractual penalty, we can infer on the basis of art. 483 and 485 of the Civil Code (Journal of Laws of 2017, item 459), which we quote below:

Art. 483 § 1 - It may be stipulated in the contract that the damage resulting from non-performance or improper performance of a non-pecuniary obligation will be repaired by paying a specific amount (contractual penalty).

As we can see from the above article, the contractual penalty is the protection of its interests - security in the event of non-performance or improper performance of the obligation by the contractor.

It is worth paying attention to the fact that the contractual penalty may only apply to a non-pecuniary obligation, and therefore it cannot be demanded with regard to cash benefits (e.g. payment of remuneration, payment for goods, etc.). Therefore, the contractual penalty may apply, for example, to mandate contracts, construction services, confidentiality contracts, etc., i.e. where the obligation is specified in a non-pecuniary form.

Contractual penalty applies to non-pecuniary obligations, but is paid in cash.

Art. 484 - In the event of non-performance or improper performance of the obligation, the contractual penalty is due to the creditor in the amount reserved for this event, regardless of the amount of the damage suffered. Claiming damages exceeding the amount of the reserved penalty is not allowed, unless the parties agreed otherwise.

§ 2.If the obligation has been largely performed, the debtor may demand a reduction in the contractual penalty; the same applies to cases where the contractual penalty is grossly excessive.

The above article tells us that the contractual penalty does not depend on the occurrence or the amount of damage. A penalty may be demanded even if the amount of the damage exceeds the amount of the agreed contractual penalty or if the damage did not occur. The reason for the contractual penalty is non-performance or improper performance of the obligation.

When the amount of the contractual penalty is lower than the resulting damage, the debtor may not be required to supplement the penalty by compensation to the amount of the damage caused - unless the parties expressly agreed so in the contract. This rigor does not apply in the event of willful misconduct by the contractor.

The payment of the contractual penalty does not release the debtor from the proper performance of the obligation, remedying the damage and its consequences.

When can contractual penalty be applied?

A contractual penalty can be applied to all contracts that relate to non-pecuniary obligations consisting in the careful performance of something (e.g. a specific task contract, orders, contracts in the construction industry, service contracts, etc.) or failure to perform something (confidentiality of the company, protection of personal data) , confidentiality, non-competition etc.).

When the contractor has withdrawn from the contract for reasons attributable to him - a contractual penalty may also be demanded - however, this is a questionable issue in the jurisprudence.

Attention!

Contractual penalty has the so-called an accessory nature - this means that if the obligation has become invalid for some reasons, a contractual penalty cannot be demanded.

The amount and form of the contractual penalty

Contractual penalty should be paid in cash. In the contract, you can specify a specific amount of the penalty (but be careful that it is not too excessive), as well as the method of its calculation (based on any criteria, e.g. a list of daily rates, an interest rate or the number of days).

When specifying the contractual penalty in the form of a calculation, it is important that the debtor can calculate it on his own, and therefore he should know all the factors and parameters that make up the formula for calculating the penalty at the time of signing the contract.

The amount of the contractual penalty determined in the above manner should be specified "at the start" in the contract - it is not allowed to determine the amount of the penalty after the occurrence of circumstances entitling to charge it.

What should the provision on contractual penalty look like?

The provision on the contractual penalty should include:

  • specification of the obligation, the non-performance / improper performance of which results in the payment of a contractual penalty,

  • the amount of the contractual penalty,

  • information on whether the penalty will be reduced in the event of partial performance,

  • decisions of the parties regarding the compensation for damages (when the penalty is lower than the damage).

Several penalties in the contract

The parties may stipulate several penalties in the contract - it is important that each penalty relates to a different (non-pecuniary) obligation. You can also specify a different penalty for improper performance of the obligation and another for its non-performance.

Contractual penalty and compensation

Contractual penalty and compensation are not mutually exclusive, as long as the contract includes both compensation and contractual penalty provisions at the same time - Art. 484 § 1 of the Civil Code (...) A claim for damages exceeding the amount of the reserved penalty is not allowed, unless the parties agreed otherwise (...).

If the contract does not contain a provision on compensation, the reservation of a contractual penalty precludes its pursuit on general principles resulting from the Civil Code.