Contractual penalties are currently commonly used as a device for inducing timeliness and quality in the discharge of obligations.  Constituting both an instrument by which to discipline contracting parties and a convenient mechanism for securing compensation claims (substituting for or supplementing the institution of compensation itself) for the unsatisfactory performance of contracts, contractual penalties have gained in importance particularly in the practice of entities organising public procurements.  Under Art. 483 of the Penal Code, a contract can carry the  reservation that the redress of damage resulting from the non-performance or inadequate performance of a non-monetary obligation must occur before payment of the amount specified in the contract (contractual penalty). But the legislator made the reservation that the contractor cannot free himself from his obligations by paying the contractual penalty without the ordering party’s consent. The non-performance or inadequate performance of an obligation may carry a contractual penalty of a specified sum irrespective of the degree of damage sustained.  However, demanding compensation at a level other than that in the set penalty amount is not admissible unless the parties to the contract agree otherwise. A contractual penalty thus simplifies the ordering party’s position in that it does not have to demonstrate the level of the incurred damage as is the case with common compensation claims.  On the other hand, if the contract made no reservation regarding the ordering party’s entitlement to seek compensation on top of the contractual penalty, then the contractual penalty is deemed to replace compensation; compensation over and above the level of the sum set in the contractual penalty clause cannot then be sought.

While one of the obvious motives for contractual penalty clauses is that strictly defined  penalties are thereby indisputable and contractually guaranteed, one should take note of the consequences of that clause by reference to the Supreme Court ruling of 6 October 2010, case ref. II CSK 180/10 (see LEX no. 970070), according to which: ”if a contractual penalty is written into a contract to cover the eventuality of the non-performance of an obligation,  the penalty is only due if the debtor(contractor) falls into arrears (with the payment/performance schedule) (Art. 476 Civil Code). The debtor (contractor) can liberate himself from the obligation to pay a contractual penalty if he undermines the assumption, as enshrined in Art. 471 of the Civil Code, that his default in fulfilling a (contracted) service is a follow-on of circumstances for which he is responsible.”  Thus, releasing oneself from the duty to pay a contractual penalty is possible both if the debtor (contracting party) is able to demonstrate the ineffectiveness of the provision in the contract itself, and if he shows that the inadequate performance of the contract (if it was subject to reservation as a basis to apply a contractual penalty) is the follow-on of consequences for which the debtor (contractor) does not bear responsibility.  The well-considered definition of the circumstances triggering the automatic imposition of a contractual penalty  should, above all, be of special concern to the contractor, still at the stage of performing the contract.  This is worth bearing in mind, especially that, in practice, all too often, one comes across cases of the unfounded automatic imposition of contractual penalties on contractors which are subject to reservation by the ordering party in public procurement contracts.  In these types of contracts, if no provision for the amicable solution of disputes is made, the contractor has no other option but to take court action in defence of his standpoint. Thus, that what the legislator intended as an instrument to simplify business dealings, frequently constitutes an instrument serving to conceal the mistakes of the ordering party, especially if the contractual penalty can be immediately deducted from the remuneration of the contractor.

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