Contractual fines are one of the most frequently used methods of ensuring that commitments are met, whereas the fine itself depends on an agreement between the parties. In case of disputes regarding the payment of a contractual fine, the Civil Code (Act No. 513/1991 Coll., § 301) allowed courts to reduce (moderate) unreasonably large contractual fines within business-legal disputes depending on the value and significance of the secured obligation up to the value of caused damage.

With effect as of 1 January 2014, the New Civil Code (Act No. 89/2012 Coll., hereinafter “NCC“) in § 2051 extends the right of moderation to all types of obligation-based relations. Courts may thus reduce unreasonably high contractual fines in all obligation-based relations, in exceptional cases even to zero.

The court’s right of moderation however has its limits, as defined by the judicature of the Supreme Court. Due to the minimal changes in the concept of the moderation right within the NCC, the current decision practices limiting the right of moderation in business-legal obligation-based relations will also apply to other obligation-based relations.

The Supreme Court’s constant decision practice states that a court cannot reduce unreasonably high contractual fines if the claim for the payment of the contractual fine expired by offset before the commencement of the court dispute (see for instance Supreme Court ruling of 28 August 2006, ref. no. 32 Odo 1007/2006). Supreme Court ruling of 30 September 2013, ref. no. 23 Cdo 2400/2012 then supplemented the previous decision practice by stating that moderation of a contractual fine is also inadmissible if the offset took place during the court dispute.

If the claimant and defendant have mutual claims against each other, the claimant may thus easily protect himself/herself against the risk of moderation of a contractual fine. If, within a dispute regarding the payment of a contractual fine, the defendant proposes that the court moderates the contractual fine due to it being unreasonable, or if the court itself points to the inadequacy of a contractual fine and states that it intends to moderate it, the claimant may offset its claim to the contractual fine against the defendant’s claim, thus excluding the possibility of moderation of the fine by the court.

However, if the offset does not forfeit the whole contractual fine, the court may still moderate the remainder of the claim to the contractual fine. Thus, if for instance the lawsuit targets a contractual fine amounting to 100,000 CZK and the claimant offsets the claim to the contractual fine against the defendant’s claim amounting to 80,000 CZK, the court may still rule on the inadequacy of the contractual fine and reduce it by the remaining 20,000 CZK.

The only possible defense of the defendant against the offset of an inadequately high contractual fine could then be to demonstrate the complete invalidity of provisions pertaining to the contractual fine. In compliance with § 588 of the NCC, legal acts which are clearly in conflict with good manners or which are in violation of the law and clearly disrupt public order are invalid. However, just because a contractual fine was inadequate does not immediately imply that it is in conflict with good manners. Additionally, the conflict with good manners must be of sufficient intensity to justify it as constituting a “clear” conflict. Thus it may also occur that an unreasonably high contractual fine remains valid even if it is in conflict with good manners.

Due to the fact that the NCC is issued on the principle of the autonomy of the will of the parties, it can be expected that provisions on contractual fines, especially those entered between two entrepreneurs, will only be ruled as absolutely invalid in court in exceptional cases.

To conclude, in case of doubts regarding the reasonability of a contractual fine, the safest course of action of a creditor is to offset the claim to the contractual fine against a claim of the debtor.

For more information, please contact K&A partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz; tel.: +420604242241.