Liquidated damages – are they worth stipulating, do they work?

Within several disputes conducted by Hoogells before the courts—resulting in favourable rulings obtained over the course of a year—the topic of contractual penalties kept recurring. The proceedings concerned contractual penalties, to varying degrees and in varying contexts, as a tool used either to pursue claims (through payment of the penalty) or to defend against claims (through payment as a result of set-off).

Contractual penalties were and remain the basic tool securing the performance of contracts—but are they effective? We present below the conclusions drawn from our practice to date, relating to the contract drafting stage, the performance stage, and the dispute stage:

• A contractual penalty should not be a filler or an embellishment in the contracts concluded, based on the unreflective assumption that the more (and the harsher) the better. We recommend moving towards: simpler, more specific.
• Stipulating contractual penalties is justified and may serve different purposes—compensatory, motivational, or repressive (all of them or only some of them). The stipulation of a contractual penalty may translate into a real receivable.
• It should be remembered to impose contractual penalties in such a way as to be able to pursue them in possible proceedings. A demand for payment, maturity of the claim, the amount of the penalty—its basis for determination—are elements that should not be underestimated.
• When structuring penalties, it is not known in what formula we will demand payment—whether as an active claimant or as a defendant actively defending itself (set-off). Regardless of the configuration, one needs to ensure the correctness of the calculation in order to be able to react adequately.
• One should not avoid—there is nothing to fear or be ashamed of—one’s own “mitigation” of the pursued penalty. Optimally, one should pursue as much as follows from the contract—nevertheless, it is good to confront this with market and court realities, with principles of equity and logic.
• It is possible to pursue various claims (e.g., substitute performance) alongside contractual penalties pursued for delay in performance or in remedying defects. It is worth comparing how all our claims look in the context of accumulation, overlap of penalties, and the grounds of liability under other titles—so as not to “overdo it”.
• Mitigation of a penalty by the court is not mandatory—much depends on the circumstances of the case and the purpose of the contractual penalty. Excessiveness of a contractual penalty is not taken into account automatically in favour of the party raising the objection—that someone claims a lot does not automatically mean they are claiming too much.

The cases, on behalf of the firm’s litigation team, were handled by Łukasz Kotarba, who—including travelling to hearings in the traditional manner and remotely—and, in the end, communicated the favourable rulings.