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.
What is a contractual penalty
A contractual penalty is, in short, a simplified compensation – the party entitled to the penalty does not have to prove the amount of damage it suffered, for example, by the fact that its contractor was late with the project, did not remove defects on time, betrayed the company’s pricing policy to competitors, etc. The only thing that the party claiming the penalty has to prove is that the contractor actually failed to do what it was supposed to do, which ran the risk of a contractual penalty. Most often, it will be precisely the deadline for completion of the contract, the response time to reported defects, or the obligation to keep certain information confidential or to refrain from competitive activities.
By way of example – a contract for the creation of a slogan and gadgets for an advertising campaign for a new product. The ordering party is concerned about timeliness, as the product is to be presented for the first time at an important industry trade fair. The contractor is 2 weeks late in handing over the materials, and in the end the ordering party receives them after the date of the trade fair (at this point I thank one of my clients for a life example – I had the opportunity to conduct just such a case). If the ordering party in the contract with the contractor did not stipulate a contractual penalty for untimeliness, in order to receive compensation, he will have to show precisely what damage he suffered because he did not have the opportunity to present the new product at the fair (e.g. how many orders he would have received if he had presented the product, how much they were worth, etc.). However, if he has stipulated a contractual penalty for failure to release the project on time – all he will have to show is that the contractor actually failed to release the project on time – and he will be entitled to the contractual penalty in the amount stipulated in the contract.
The main features of a contractual penalty
A contractual penalty can be reserved only as to so-called non-monetary performance (e.g., performance of a contract, delivery of equipment, removal of a defect, refraining from certain actions). Therefore, the provisions that I happen to see in contracts, which reserve the contractual penalty for the circumstance of “failure to pay on time for the performance of the contract”, will simply be invalid. This is because a contractual penalty cannot be reserved for late payment – that is the purpose of interest for delay.
The contractual penalty can be reserved in the form of a specific lump sum (e.g. PLN 20,000, EUR 50,000), a specific % (e.g. 0.1% of the net contractual remuneration, for each day of delay in the execution of the contract) or provide for another method. It is important that the penalty so stipulated be calculable and that it does not pose exceptional difficulties. However, there is no restriction on the minimum or maximum amount of the penalty, with the exception that if the penalty is “grossly excessive,” the party that must pay the penalty will be able to demand a reduction.
It is very important that a contract in which we guarantee ourselves the possibility of claiming a contractual penalty from the other party also stipulate that we can claim damages in excess of the stipulated contractual penalty (that is, that we can claim an amount higher than the amount of the contractual penalty stipulated in a given case). Otherwise, the contractual penalty will be our compensation glass ceiling. On the other hand, it is not difficult to imagine that the stipulation of even a relatively high penalty may not cover the entire damage, particularly in the case where the penalty was intended to protect our company’s confidential information from leakage, or to prevent the competitive activities of our employee or collaborator who has extensive knowledge of our company’s know-how, applied prices, discount policies, etc.
Special cases of contractual penalties in labor law and the PPL
The stipulation of contractual penalties is also possible in labor law contracts and in contracts concluded under the Public Procurement Law (PPL).
In the first case, contractual penalties for violation of a non-compete by an employee after termination or expiration of an employment contract are particularly relevant and widely used. A non-competition agreement after termination of the employment relationship is concluded while the employment contract is still in effect (often with the conclusion of the employment contract itself). There is no obstacle to subjecting an employee’s violation of a non-compete after leaving employment to just a contractual penalty. However, it is important to remember to properly indicate its amount – ideally, it should be somehow related to the amount of, for example, the salary the employee received before leaving, or the amount of compensation the employer is obliged to pay the former employee for the duration of the non-compete. Then we minimize the risk of finding the penalty “grossly excessive.”
On the other hand, the PPL provides for a special case when the contractual penalty is due in principle for non-performance of a monetary obligation – we are referring to Article 143d(1)(7)(a) of the PPL. This provision provides for a contractual penalty payable to the contracting authority in the event that a construction contractor pays subcontractors or further subcontractors late or not at all. The Supreme Court, in a very fresh ruling on June 30, 2020. (III CZP 67/19), confirmed the permissibility of such penalties in such contracts. The Supreme Court’s position is not surprising, as the PPL explicitly provides for the obligation to include a provision on penalties in such cases in construction contracts concluded under the PPL.
