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Contractual penalty - what is it and when is it applied?

The parties concluding the contract are free to define its terms so that it corresponds to the nature of the legal relationship between them. One of the means that they can use to achieve such an assumption is to impose a penalty on the party that has not performed or improperly performed the contract. Contractual penalty, regulated by the provisions of the Civil Code, is most often used for this purpose. In addition, it is a security in the event of circumstances causing the risk of non-performance of the contract.

Contractual penalty - characteristics

If one of the parties suffers damage due to non-performance or improper performance of the contract, the other will be obliged to pay the sum indicated in the contract - such a regulation is included in Art. 483 § 1 of the Civil Code. This means that the parties may stipulate in the content of the contract that the damage will be repaired in the form of payment of the amount agreed by them. However, it is not allowed for one of the parties to refrain from performing the contract and, alternatively, to pay the sum indicated in the contract as a contractual penalty. This would conflict with its preventive and repressive nature. The contractual penalty is intended to motivate the performance and not its equivalent. Moreover, contractual penalties apply only in the case of non-pecuniary obligations - delay in the payment of cash benefits results in the charging of late payment interest.

The amount of the contractual penalty

The amount of the contractual penalty depends on the parties and the manner in which they will regulate this issue in the contract, and not on the extent of the damage suffered by the party for whom the obligations were not fulfilled or improperly fulfilled. The claim arises when the claimant suffers damage, so proving that the damage did not arise is tantamount to proving that there were no circumstances justifying the payment of the penalty.

The amount of the contractual penalty is influenced by the partial performance of the obligation. Article 484 § 2 indicates that if the performance is partially met, the debtor may request a reduction in the amount of the penalty. It is entitled to do so, especially when a significant part of the obligation has been fulfilled on time and the delay is small.

The reduction of the contractual penalty is also justified when it can be described as grossly excessive. This is a very general concept, but the judgment of the Supreme Court of February 9, 2005, in which the court stated that Contractual penalty may be considered grossly excessive if it is equal to or close to the amount of the delayed obligation for which it was provided for. However, it is not excluded in this amount if the debtor has not performed the service at all for the period for which it was calculated. In such a case, he would have to question the validity of the contract in terms of the amount of the contractual penalty, due to its inconsistency with the law or the principles of social coexistence. (art. 58 of the Civil Code). (II CK 420/04).

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Types of contractual penalty

Contractual penalties can be divided into four categories. Belong to them:

exclusive contractual penalty - in the event that the contract is not performed or performed improperly, the creditor may not require the debtor to pay a sum higher than the amount of the contractual penalty provided for in the contract.
alternative contractual penalty - the creditor may demand payment either for a contractual penalty or for compensation.
creditable contractual penalty - the creditor may demand the payment of a contractual penalty and additional compensation up to the amount of the damage suffered as a result of non-performance or improper performance of the obligation.
cumulative contractual penalty - the creditor may apply for both the contractual penalty and the compensation.

The above division results from Art. 484. According to him, the parties will be able to claim higher damages than the penalty stipulated in the contract only if they include such a provision in the contract. If there is no provision, they may only demand the amount of the contractual penalty, even if the damage exceeds the amount of the contractual penalty.

Contractual penalty and compensation on general terms

These two institutions are very similar to each other. Both are regulated in the Civil Code, both apply when the obligation towards one of the parties has not been met, and both arise when the damage occurs on the part of the creditor. However, despite the obvious similarities, they cannot be equated with each other.

The main difference between them is the source - the amount and rules for calculating the contractual penalty must be specified in the contract concluded between the parties, while the right to compensation results directly from the act. They also differ in scope - while a contractual penalty may be imposed only for non-pecuniary obligations, compensation may be claimed for any type of contract.