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The legal regulation of the conditions for the valid negotiation of a contractual penalty is contained in the Civil Code. When negotiating a contractual fine, the contracting parties should primarily base it on its purpose, i.e. flat-rate damages in case of breach of contractual obligations. The contractual penalty should not aim at sanctioning the exercise of rights from contracts.
In accordance with the provisions of the Civil Code, the court has the so-called right of moderation, i.e. the possibility to reduce a disproportionately high contractual penalty at the request of the debtor, taking into account the value and importance of the secured obligation. As a result of such a court decision, the creditor's right to a contractual fine expires to the extent corresponding to the reduction of the fine by the court decision.
On January 11, 2023, the Grand Chamber of the Supreme Court, by decision no. 31 Cdo 2273/2022-162 deviated from the current decision-making practice based on the effective days of the Commercial Code, from which the legal regulation of contractual fines was mostly taken over into the Civil Code. In its previous decision-making practice, the court settled on the opinion that the unreasonableness of a contractual fine can only be decided by taking into account the circumstances that existed at the time of its negotiation, i.e. the amount of the fine cannot be assessed from the point of view of circumstances that arose after the contractual fine was negotiated.
In this ground-breaking decision, the Grand Chamber points out the need to also take into account the broader circumstances that occurred after the breach of the contractual obligation. The courts should thus assess the adequacy of the amount of the claim for the payment of the contractual penalty, not only the adequacy of the agreement on the contractual penalty itself.
In the view of the Supreme Court, the three-step procedure of the court should therefore consist of the following actions:
In the first stage, the court will review, according to the interpretative provisions of the Civil Code, what function the contractual penalty was supposed to fulfill within the given contractual relationship.
In the second stage, the court will review all the circumstances of the case, taking into account all the circumstances already known at the time of its negotiation, as well as the circumstances existing during the actual breach of duty and the circumstances that occurred after the breach of contract in question.
In the third stage, the court will then assess whether the amount of the fine is reasonable in relation to its functions and the interests of the duty secured.
If there is a large disparity between the agreed amount and the actual damage suffered by the creditor, the court may reduce the amount, although at the time of the conclusion of the contract the amount of the agreed fine seemed reasonable. The right of moderation should be applicable when it is clear that the originally agreed amount substantially exceeds the actual damage.
The Grand Chamber concludes that the starting point of the moderation law of a contractual penalty is the examination of the adequacy of a specific claim for a contractual penalty, and its aim is to ensure that, with regard to the specific interests of the parties, the creditor is not paid a clearly disproportionate contractual penalty.
The decision of the Supreme Court under 31 Cdo 2273/2022-162 therefore results in the conclusion that when assessing the inadequacy of a contractual fine, it is necessary to take into account not only the circumstances known at the time of concluding the agreement on the contractual fine, but also the circumstances that existed at the time of the breach of duty , as well as the circumstances that occurred after the breach, if they undoubtedly have their origin in the breach of contractual obligations and if they were foreseeable at the time of the breach of obligation.