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BRAND: The Role of the Penalty Clause in Business

In the latest volume of the BRAND, the legal adviser Maria Stegariu, in the article The Role of the Penalty Clause in Business, explains the most important things that need to be known regarding the penalty clause and emphasizes the place that the penalty clause occupies within a business.

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There are two reasons that stay on the basis of tackling this matter and make it appealing. The first one is the fact that provisions which control the contractual liability and those which refer to the penalty clause are susceptible to interpretation. The second one is the way in which particular proposals that aim at the regulation of situations which are not yet provided by law are conceptualized.

The penalty clause represents an agreement between the creditor and the debtor, which provides that, in the case of not fulfilling the contractual obligation, the debtor commits himself to pay to the creditor a specific amount of money stipulated in the contract, called the penalty. Resulting from the definition itself, the penalty clause has four features: it is a convention between the parties, it must be in written form, it is an auxiliary convention, and it has as the object the payment of a penalty.

There are three situations that inevitably lead to resorting to the penalty clause: not meeting the contractual obligation, the improper performance of the contractual obligation and the delay of it. In the first case, the creditor is given two options to choose from; which are asking either for forced execution in nature or for the penalty clause. If it has been stipulated in the contract, while in the other two cases, the creditor can ask at most for the penalties for delay and for the performance of the obligation, as the payment of the penalties does not take the place of the performance of the contractual obligation.

However, there must be met some certain conditions in order to give penalties. Among these conditions, there are included: the existence of a contract concluded in written form, the presence of one of the three situations mentioned above, the damage, the debtor’s culpability, and other.

An idea worth remembering is that the penalty clause is not meant to be taken advantage of in case of damage, but it is a way of avoiding in the first place the potential damage by enforcing the contractual obligation. In other words, the penalty clause comes as a real help for business, as it protects it from falling apart. Thus, it performs the following functions: sanctioning, reparatory, evaluating, and guarantee.

But, despite the fact that the penalty clause stipulated in the contract has legal force and it cannot be either removed or reduced by the court. The New Civil Code exceptionally allows two cases in which the court can reduce the penalty: the former is the case of a partial performance of the main obligation that leads to the benefit of the creditor and the latter is the case of a large discrepancy between the amount of money and the damage that could have been anticipated in the beginning. Even so, there is a cutback limit established by the law, specifying that the reduced penalty must remain bigger than the main obligation.

To sum up, the penalty clause brings many benefits to creditors, as they are entitled to an established amount of money stipulated in the contract, in the case of damage caused by the debtor, without having to actually prove the existence of that damage, nor the value of it. As the world of business itself is at times uncertain and fragile, the help given by the penalty clause represents the necessary certainty of recovering in case of damage.

Read more here!

Daniela Angheluş