Moderation of contractual penalties – A key to justice in agreements

In agreements concluded between parties, provisions regarding contractual penalties often appear as a mechanism to secure the interests of the parties in cases of non-performance or improper performance of non-monetary obligations. Although penalty clauses aim to discipline the parties to properly fulfill the terms of the agreement, they may, in practice, lead to situations where one party faces disproportionate financial burdens. Legal regulations, particularly Article 484 of the Civil Code, provide for the possibility of moderating the amount of contractual penalties, serving as an important mechanism for protecting the weaker party to a contract.

The Role of Contractual Penalties in Agreements

As previously mentioned, the concept of a contractual penalty is a form of securing the performance of contractual obligations. According to the Civil Code, the parties to an agreement may stipulate a penalty clause requiring one party to pay a specified amount to the other in the event of non-performance or improper performance of an obligation. As a rule, the penalty is due to the creditor in the agreed-upon amount regardless of the actual damage incurred due to the breach of the contractual obligation.

The primary purpose of penalty clauses is to prevent violations of the agreement and to compensate for any potential losses resulting from non-performance. However, claiming damages exceeding the stipulated penalty amount requires including such a clause explicitly in the contract, which should be considered when drafting its terms. Particularly in public procurement proceedings, it is necessary to specify an upper limit for contractual penalties, as mandated by Article 436 point 2 of the Public Procurement Law.

Although contractual penalties serve a preventive and motivational function, they are often perceived by one party as excessively burdensome, especially when the obligation has been largely fulfilled. Significant issues arise when the stipulated penalty amount is disproportionate to the value of the obligation or the actual damages caused by the contract breach.

Moderation of Contractual Penalties

The moderation of contractual penalties is a legal institution allowing judicial review to reduce the penalty amount under two circumstances:

• When the penalty is grossly excessive, meaning it is clearly disproportionate to the scope of the breach.
• When the obligation has been substantially fulfilled.

According to case law—specifically, the Supreme Court’s judgment of May 23, 2013 (case no. IV CSK 644/12)—a penalty equal to or close to the value of the obligation may be deemed grossly excessive.

The possibility of moderating a penalty due to substantial performance of the obligation is based on the assumption that partial performance satisfies the creditor’s legitimate interest (cf. M. Załucki (ed.), Civil Code. Commentary, 4th ed., Warsaw 2024).

Additionally, the Supreme Court, in its judgment of May 29, 2018 (case no. IV CSK 621/17), stated: “The moderation of a contractual penalty is an expression of the court’s right to intervene in the contractual relations of equal parties, and the criteria for reducing the penalty are not exhaustive. When assessing the penalty amount in light of a plea for moderation due to its gross excessiveness, various factors must be considered, including the existence and extent of the damage. Axiological considerations support the view that a penalty clause should not lead to unjust enrichment of the creditor. Damage caused by non-performance or improper performance of the obligation determines the creditor’s interest protected by the penalty payment, and the moderation provided under Article 484 point 2 of the Civil Code aims to counteract disproportion between the penalty amount and the creditor’s legitimate interest.”

Moderation of contractual penalties thus allows the liability to be adjusted to the actual circumstances of a given case. Moreover, it serves as an element of safeguarding the interests of the parties, particularly when one party is in a significantly weaker negotiating position or when excessive financial loss arises due to an overly high penalty clause.

The Significance of Moderation of Contractual Penalties

Moderation of contractual penalties is not merely a tool for protection against excessive burdens but also an essential element of ensuring fairness in contractual relations. Thanks to this institution, the parties to a contract can expect the court to thoroughly consider the circumstances of the case, taking into account not only the terms of the agreement but also the factual and economic realities. This approach promotes balance between the parties, preventing situations where one party bears disproportionate consequences for a breach of contract.

Conclusions

The moderation of contractual penalties is a key mechanism for ensuring fairness in contractual relations. It allows for judicial adjustment of penalty amounts to reflect the actual circumstances and prevents excessive burdens on one party. It is crucial for the contracting parties to pay particular attention to penalty clause provisions during the drafting stage to ensure a proper balance and avoid future disputes arising from disproportionate penalties.