Contractual penalties are quite often used in B2B contracts. This is a useful institution that facilitates redress in the event of breach of contract by a col.
Amount of contractual penalties in a B2B contract
While in the case of an employment contract, the employee’s liability is regulated by the Labour Code and there is no great freedom in shaping it, in a B2B contract, contractual penalties of any amount may be provided for. However, parties shall take care to ensure that the penalty is commensurate with the offence – if it is disproportionately high, it may not be enforceable.
In the case of medium-sized enterprises, contractual penalties in the range of PLN 100,000 – 250,000 are usually applied, as such an amount corresponds to the potential consequences of a breach of contract. Of course, the amount may vary in each situation, as it should also be adjusted to the type of misconduct. For example, disclosure of a contractor’s sensitive data threatened with a penalty of PLN 600,000 is justifiable, but the adoption of such a penalty for failure to provide a document of minor importance to the operation of the company could be considered excessive.
Is it necessary to stipulate a specific amount of contractual penalty?
The contractual penalty can be specified in a specific amount, as in the examples above, but also as a percentage of a specific sum (e.g. a certain percentage of the salary remaining to be paid).
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For what circumstances can a contractual penalty be reserved?
There is no catalogue of situations that can be subject to a contractual penalty. Importantly, it may only relate to non-monetary obligations (which means that a contractual penalty cannot be provided for in the event of non-payment of price or remuneration).
It is worth applying this institution flexibly, depending on specific needs. The most common areas subject to contractual penalty are breach of non-competition, breach of confidentiality and delay in performance of the contract. Usually, these are the areas of most concern to counterparties. It is also common to find an obligation to pay a contractual penalty as a result of the other party withdrawing from the contract through the fault of the counterparty (this applies mainly to construction contracts).
The biggest advantage of a contractual penalty
The biggest advantage of adopting a contractual penalty in a B2B contract is that it is easier to claim if a collaborator breaches the contract. In simple terms, it is not necessary to prove the amount of damage suffered (and often establishing the amount of damage is problematic) – it is enough to ask for payment of the specific amount adopted in the B2B contract.
What if the damage exceeds the value of the contractual penalty?
If, as a result of a breach of the B2B contract, the counterparty has suffered damage exceeding the amount of the contractual penalty, you should reach into the contract and check whether it contains a clause that usually reads as follows: ‘If the amount of damage exceeds the amount of the contractual penalty, the party may claim additional damages’. When such a clause is missing from the contract, only the contractual penalty specified in the B2B contract is due to the counterparty.
Defences to payment of liquidated damages – mitigation, lack of harm or fault
From the perspective of a co-worker obliged to pay a contractual penalty, there are several possibilities to challenge the obligation. The basic one is to mitigate the contractual penalty, i.e. to demand a reduction. This institution may be used in two cases – when a significant part of the contract has already been performed or when the contractual penalty is grossly excessive (therefore, it is recommended to adopt reasonable penalty amounts in contracts).
The obliged party may also plead that he or she is not at fault for failing to fulfil his or her obligations (e.g. if he or she has not completed his or her tasks on time due to organisational problems of the principal).
The third possibility is an ambiguous issue, depending on the specific situation (it will not always be an effective form of defence). This is the possibility of claiming that the other party to the contract did not suffer any damage at all, despite the obliged party’s failure to fulfil its obligations. That is, if there has admittedly been misconduct, but the other party has not suffered any damage as a result, this circumstance can be invoked.
If it is important to us, for example, the deadline for performance of the contract, or the other party’s actual compliance with the order of confidentiality of information – consider including a contractual penalty in the designed contract. This is because it is one of the more “malleable” creations of civil law, which can be easily adapted to almost any type of contract.
Almost inherent in every Non-Disclosure Agreement (NDA) is a contractual penalty for failure to respect the confidentiality of the information provided. In practice, this is a very convenient measure, both disciplining the counterparty and expediting claims if our counterparty discloses the confidential information provided to it.
