The contractual fine is one of the most frequently used and most effective means of legal security in contractual relationships, which is currently governed by two laws, the Civil Code (hereinafter “CivC”) and the Commercial Code (hereinafter “ComC”). When to use the regulations of the Civil Code or those of the Commercial Code is not always clear and the differences between regulations on contractual fines are significant.
The New Civil Code, i.e. Act No. 89/2012 Coll., (hereinafter “NCivC”) eliminates this dual-track legislation and introduces uniform regulation.
1. A contractual fine is no longer security, but affirmation of debt
A contractual fine is newly designated as a means of affirming debt (see Section 2048 et seq. of the NCivC) and not a form of security, which according to the wording of the NCivC means it is no longer an institute by which to increase the possibility of satisfying the creditor by either providing security with a certain quantifiable value (e.g. a lien), or giving the creditor the option of demanding payment from another party (e.g. surety), but strengthens the position of the creditor in another manner – i.e. by affirming the debt. Current legislation does not include such a distinction and classifies both security and affirmation under the single term “security for obligations”.
2. Non-financial contractual fine
Hitherto, it was disputable whether or not it was possible to arrange a contractual fine in a form other than a financial penalty, as neither the ComC nor the CivC stipulated anything on the subject of performance. In contrast to current legislation, the NCivC therefore expressly provides for the negotiation of contractual fines in a form other than financial performance (see Section 2048 NCivC), whereby this contestable issue will be resolved. It will therefore now be possible to arrange payment of a contractual fine “in kind”, where one of the parties, for example, provides goods that it manufactures by virtue of the contractual fine.
3. Objective liability
The NCivC does not link the obligation to pay a contractual fine to an attributable breach of obligation, and therefore, in contrast to current legislation, pursuant to Section 545 (3) of the ComC, the debtor is obliged to pay the contractual fine, even if it was not responsible for the breach of contractual obligation. However, this does not prevent the contractual parties from agreeing that the payment of a contractual fine is linked exclusively to an attributable breach of obligation, as the NCivC does not preclude such an arrangement and leaves the possibility of negotiating contractual fines very open.
4. Form, or not only written
An important change is the elimination of the requirement for the negotiation of contractual fines in written form. It is therefore newly possible to consider negotiating contractual fines verbally; however such arrangements cannot be recommended due to the considerable difficulty of proving such an agreement, which in the absence of witnesses borders impossibility.
5. Consumption of entitlement to damages
In Section 2050, the NCivC also envisages a solution in which the contractual fine consumes entitlement to damages by law. In layman’s terms, this means it is only possible to claim one or the other, which differs from current legislation. However, it is worth noting that this is evidently not a mandatory provision, as it does not have the form of a prohibition, and thus, in accordance with Section 1 (2) of the NCivC, nothing prevents the parties from arranging both a contractual fine and entitlement to damages, thereby excluding the application of Section 2050, as is the case today.
6. Moderation of the court
As stated above, unless both a contractual fine and entitlement to damages are stipulated in the contract, it can be expected that contractual parties will be negotiating higher contractual fines in order to cover potential damages that may arise.
If such an agreed fine is excessively high, Section 2051 of the NCivC establishes the debtor’s right to seek a reduction of this excessively high contractual fine by the court. However, without a motion for such a reduction, the court cannot intervene on its own, which is a significant change from the current provisions of the CivC.
The question is whether it will be possible to exclude the application of this provision by agreement between the parties. According to Section 1 (2) of the NCivC, one is inclined to believe it will be possible, as the NCivC does not expressly prohibit this. This is, by nature, a waiver of a right that could arise in the future, which is generally permissible under the NCivC. Where the NCivC prohibits a waiver in advance, this is always expressly stated (e.g. it is not possible to waive the right to protest statutory limitation – Section 610 (1) NCivC, the right to protest invalidity – Section 1755 NCivC, and, with the exception of legal subjects, it is not possible to waive the right to seek abolition of an obligation – Section 2000 (2) NCivC, etc.). However, there is no prohibition on waiving the right to protest an excessively high contractual fine in the NCivC.
7. Conclusion
To summarise, it can therefore be said that the new regulation of contractual fines eliminates current dual-track legislation and brings some interesting changes. It will, for example, be established that contractual fines can be arranged in other than financial form and do not need to be agreed in writing.
Under the NCivC, the contractual fine will be designed to consume entitlement to damages and is thus a generalisation of damages, wherein, if such generalised damages are agreed in an excessively high amount, it will be possible to moderate this amount on a motion by the debtor, up to the amount of damages. An attributable breach of secured obligations will not be required for the application of a contractual fine. However, in view of the dispositive nature of the NCivC, it does not force contractual parties to adopt this regulation and gives them the option of arranging a contractual fine that suits them, for example, in the same way as under current legislation.